Alpha Generators Harvard Management Company Inc's (HMC) is similar to all other University endowments but its structure and approach are unique within the realm of private endowments in important ways. In approach, HMC blends the best of two worlds, by leveraging the University’s intrinsic attributes – a large, patient pool of single-source capital, a AAA credit rating, and a world-class reputation – to take the long view with direct investments in the capital markets while also accessing some of the best external investment management available in the marketplace.
HMC seeks to add value in every element of the investment stream. This starts at the asset allocation level. Each year, HMC’s Board of Directors and management team determine an appropriate allocation of Harvard’s capital across various markets given the University’s desired return target and risk tolerances. Today, capital is allocated across eleven non-cash asset classes. While significant changes are not generally made on an annual basis, Harvard’s investment mix has evolved significantly over its history.
Approximately two-thirds of HMC’s returns have been historically derived from the choices it has made regarding which markets to invest in and by how much. HMC’s optimal mix is reflected in its “neutral asset allocation” and serves as a benchmark against which active management is evaluated.
Neutral Asset Allocation
Once the neutral allocation guidelines are determined, HMC’s management is charged with the selection of appropriate implementation vehicles. Both internal and external vehicles are employed to optimally deploy capital across all asset classes. This active use of specific investment strategies is aimed at delivering additional value over and above what can be realized by investing in a passive portfolio.
Alpha Generators
HMC uses a variety of alpha generators to add value. Examples include absolute return strategies, including equity and fixed income arbitrage, beta exposure management (e.g., timber), enhanced cash management, structural alpha trades, and tactical adjustments to the asset allocation. All of these alpha generators help HMC focus on delivering a superior, risk-adjusted return across all of its asset classes (after all fees required to generate that return). The result is a highly diversified investment portfolio, managed in a responsive manner, and backed by effective risk management.
Equally important to deploying capital is designing and developing appropriate monitoring mechanisms and reaction functions. To do this HMC combines bottom-up and top-down assessments with a portfolio level reconciliation of aggregated risk factors and management of correlated risk factors.
