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posted by martyb on Friday August 21 2015, @12:43AM   Printer-friendly
from the course-correction dept.

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."


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  • (Score: 2) by Non Sequor on Friday August 21 2015, @03:33AM

    by Non Sequor (1005) on Friday August 21 2015, @03:33AM (#225685) Journal

    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.

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  • (Score: 2, Informative) by Anonymous Coward on Friday August 21 2015, @04:24AM

    by Anonymous Coward on Friday August 21 2015, @04:24AM (#225704)

    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

      by Non Sequor (1005) on Friday August 21 2015, @04:01PM (#225898) Journal

      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.

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  • (Score: 0) by Anonymous Coward on Friday August 21 2015, @05:33AM

    by Anonymous Coward on Friday August 21 2015, @05:33AM (#225720)

    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.