By Svea Herbst-Bayliss
BOSTON, Jan 25 (Reuters) - Harvard University plans to outsource most of its investment management activities and cut its endowment staff by roughly half, in a dramatic overhaul in how the Ivy League school's $35.7 billion in assets are managed.
As the richest university in the world, Harvard's decision to break with its long-held hybrid investment model, in which a portion of the endowment has been managed in-house, could prompt a bidding war among institutional money managers eager for new business.
The chief executive of Harvard Management Co, which manages the university's endowment, announced the plans in a letter on Wednesday. N.P. Narvekar, who was hired as chief executive in September, said the investment arm will shut down its internal hedge funds and let traders go by the middle of the year.
The internal team that oversees real-estate investments will spin out into an independent group that is expected to keep managing money for Harvard.
HMC will lay off roughly half of its 230-person staff, by the end of the year.
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"The investment landscape has evolved significantly, requiring us to adapt two aspects of HMC's organizational and investment models in order to maximize performance over the long term," Narvekar wrote in the letter.
For decades, Harvard's investment performance was the envy of the financial world, but it has lagged rivals for some years now and posted its worst performance since the financial crisis in fiscal 2016 when the portfolio lost 2 percent.
Harvard has long operated differently from most other schools, including fellow Ivy Leaguer Yale, managing some of its money internally and farming out only a portion to external managers, including a number of prominent hedge funds whose founders once worked at Harvard Management. Yale's endowment, long lead by David Swensen who picks outside managers to invest the money, earned a 3.4 percent gain in fiscal 2016, beating many rivals and raising its endowment to $25.4 billion.
Harvard first hinted at upcoming changes in June as performance continued to lag.
Still Narvekar's letter, first reported by The Wall Street Journal, shocked the investment world.
"The Yale model wins," said Charles Skorina a researcher and executive recruiter who closely follows Harvard and other big endowments. "This is an acknowledgement that most of the smartest people will always work for someone else, so Harvard will now place their money with the best outside managers."
Harvard already put money with hedge funds like Seth Klarman's Baupost Group, Adage Capital and former investment chief Jack Meyer's Convexity Capital. Now others may want to line up. "The cache of managing money for Harvard is, of course, incredible," said one fund manager who asked not to be named because his firm might want to bid for some business.
But there is also the flip side that some of the industry's best managers are relatively small and cannot absorb the size of Harvard's investments.
While Narvekar is preparing to lay off dozens of employees, he is also hiring a team of four investors who he said will be instrumental in moving Harvard away from its specialized asset class investing approach to a more generalist model.
The four are Rick Slocum, who will join in March as chief investment officer, and Vir Dholabhai, Adam Goldstein and Charlie Saravia, who will be managing directors. Goldstein and Saravia worked with Narvekar previously when he ran Columbia University's $9.6 billion endowment.
Narvekar is Harvard's fourth investment chief since 2005, succeeding Stephen Blyth, who held the position for only 18 months before resigning unexpectedly in July.
(Reporting by Svea Herbst-Bayliss; Editing by Leslie Adler and Tom Brown)