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Victor Fleischer writes in the NYT that university endowments are exempt from corporate income tax because universities support the advancement and dissemination of knowledge. But instead of holding down tuition or expanding faculty research, endowments are hoarding money. Last year, Yale paid about $480 million to private equity fund managers for managing about $8 billion, one-third of Yale's endowment. In contrast, of the $1 billion the endowment contributed to the university's operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at Harvard, the University of Texas, Stanford and Princeton.
Fleischer, a professor of law at the University of San Diego, says that as part of the reauthorization of the Higher Education Act expected later this year, Congress should require universities with endowments in excess of $100 million to spend at least 8 percent of the endowment each year. Universities could avoid this rule by shrinking assets to $99 million, but only by spending the endowment on educational purposes, which is exactly the goal. According to a study by the Center for College Affordability and Productivity a minimum payout of 5 percent per annum, would be is similar to the legal requirement for private and public foundations. "The sky-high tuition increases would stop, and maybe even reverse themselves. Faculty members would benefit from greater research support. University libraries, museums, hospitals and laboratories would have better facilities," concludes Fleischer. "We've lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university's endowment."
(Score: 2) by Grishnakh on Friday August 21 2015, @12:49AM
Ok, I'm not an expert on this stuff, but I thought the whole idea of an endowment was that it was basically a nest egg. It's sorta like an individual's retirement fund: it's their entire life savings, and they're hoping to live off of it, and the interest it generates, for the rest of their life. Same with idle wealthy (but frugal) people: they save up all their money, and then just live off the interest in their savings and investments, so they don't have to work any more. Isn't this what university endowments are for? The interest generated from them funds the operations of the university, or at least whatever isn't funded by their income sources (mainly tuitions). It's not meant to be a pile of cash to be given away or spent on stuff. As for hedge funds, it's no different than your IRA: if hedge funds are making a higher return than other mutual funds, people invest more in them. With a crappy economy, people tend to invest more in these funds.
Assuming the university can't just one day decide to cash out its endowment and give it all to the President and Deans, I don't really see what the problem here is.
(Score: 5, Interesting) by Whoever on Friday August 21 2015, @01:50AM
Did you miss the part where Yale paid fund managers about 6% of its endowment fund to fund managers?
Although I don't see any proposed changes directly affecting this. But really 6% of the fund paid to fund managers. Given the research that shows how ineffective fund managers are over the long term, that doesn't seem like good value for money.
(Score: 2) by Grishnakh on Friday August 21 2015, @02:51AM
You expect me to read TFA?
Yes, that seems rather ridiculous actually, unless they're really getting a huge return from the hedge fund, which seems unlikely.
I was just speaking about endowments in general terms.
(Score: 2) by Non Sequor on Friday August 21 2015, @03:33AM
It seems more likely that there was a mistake in the reporting there. I know that investment management fees for pension funds tend to be less than 0.4% per year and larger funds should be getting better deals.
6% is outlandish unless it's counting money that has to be locked up for multiple years for a hedge fund investment. If this is counting a hedge fund investment, they can get the money back, although it may take months, which is a different kind of problem.
Write your congressman. Tell him he sucks.
(Score: 2, Informative) by Anonymous Coward on Friday August 21 2015, @04:24AM
FTFA: Last year, Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment.
FTFWIKIPEDIA: [wikipedia.org] Carried interest or carry, in finance, specifically in alternative investments (i.e., private equity and hedge funds), is a share of the profits of an investment or investment fund that is paid to the investment manager in excess of the amount that the manager contributes to the partnership. As a practical matter, it is a form of performance fee that rewards the manager for enhancing performance.
Also, carried interest is a way to pay fund managers earned income but pretend that it is capital gains so that they can avoid half or more of the income tax that would have been due had they earned it doing any other form of work.
(Score: 2) by Non Sequor on Friday August 21 2015, @04:01PM
Okay, this makes more sense. A typical hedge fund fee arrangement is supposed to be 2% of net asset value plus 20% of performance in excess of a benchmark. Those fees make sense on 8 billion, assuming a banner year performance-wise.
Locking up a third of assets in this kind of thing is outside of my world. I don't work with the investments, but considerations related to return over long periods of time are part of my actuarial work. For pensions it's unusual for alternative investments to exceed 10% of total assets. The management fee component of this is more crucial for budgeting investment fees. If the fund stops performing, paying out 2% per year for an illiquid investment is toxic. As I noted, most investment managers for conventional investments aren't carving out anything nearly that large as a fixed percentage of assets.
I agree that the carried interest tax loophole is ludicrous.
Write your congressman. Tell him he sucks.
(Score: 0) by Anonymous Coward on Friday August 21 2015, @05:33AM
It seems more likely that you are full of sh*t.
Just because you think you know about what normal funds charge does not mean that the article is wrong.
(Score: 1) by eof on Friday August 21 2015, @04:17AM
Yale didn't pay 6% of its endowment to the fund managers, it paid $480M for managing $8B (of a ~$24B endowment). It isn't clear how that payment is structured. For example, do the managers have to meet some target to get paid? Was the payment covering costs for one year? I do think it is a lot, but I'm sure Yale knows how to hold onto its money.
(Score: 3, Informative) by Whoever on Friday August 21 2015, @05:27AM
Actually, if you read TFA, there is a suggestion that there are some sweetheart deals under which the same wealthy fund managers who donate to the university get the fund management business.
(Score: 1) by slap on Friday August 21 2015, @06:39AM
As the amount invested increases, the percentage that is paid to the fund managers decreases. Frankly, for $8B, they should be paying at most 1%. Heck, I'm paying only ~ 1.7% on my investments, and it's several orders of magnitude less.
(Score: 3, Insightful) by TheRaven on Friday August 21 2015, @11:23AM
I read TFA yesterday when it was on the green site. They did pay 6% to the fund managers, but at the same time the fund grew by 20-30% (I don't remember which out of Yale and Harvard was closer to 20 and which to 30). Most of the 6% that they got was the share of the growth that they're paid. If I could pay someone 6% of my net worth in exchange for increasing my net worth by 30%, I'd happily do it.
The problem is not that universities did this, it's that we've set up an economic system where owning capital is a better way of gaining income than doing work.
sudo mod me up
(Score: 3, Insightful) by Whoever on Friday August 21 2015, @03:17PM
Would you? What if the stock market averages increased by 25-35% during the same period? What if the following year, your net worth declined by 25%?
The problem with such agreements is that they give a strong incentive to the fund managers to make risky investments which may not be good investments over the long term.