When a button marked "HARV" flashes on the telephone switchboard in almost 50 investment banking firms on Wall Street, stock traders know that the nation's richest university wants to do some business. At Harvard Management Company (HMC) in Boston's financial district, one of the four traders simply places a call on one of the 90 direct lines to the money moguls to ask, "What's your market in stock X, Y, or Z?" Through such second-long transactions, Harvard traders shuffle around an average of $4 million each day. In the last three months, under HMC's care, the endowment raked in a 10-cent profit for every dollar moved in daily trading.

HMC has made it to the major leagues in money management. Established in 1974, HMC is one of the country's only in-house management firms for a university. Other universities find that hiring outside money managers and paying them a percentage of assets each year is more cost effective than setting up an in-house operation, but Harvard allocated almost $10 million last year to pay managers to invest its own money. And as the University's money traders push the endowment past $3.5 billion, HMC is making a name for itself in investment banking circles.

"We are an investment management company," says Walter M. Cabot '55, president of HMC. The difference is: "We happen to manage Harvard's account."

While Harvard's account is not the biggest one around, it's still large enough to attract notice.

"The benefit of having that much money is that Harvard can be on that [institutional] level. That much more volume and money commands that much more attention," says Charles Harvey, an investment executive at Paine Weber in Boston. It's not only volume though; "Harvard commands that much more attention," he says.

"It's an advantage for Harvard students because the endowment gets bigger with shrewd investment," Harvey notes.

According to Dean Hilzenrath, vice president of Morgan Stanley, his firm has direct lines to about 150 clients around the country. Harvard is one of these clients. "Harvard is on the list of large institutional clients of major investment banking firms; for sure it's in the top 200," says a senior partner at one Wall Street investment firm who asked not to be idenitified. "Major investment firms all have major trading relations with Harvard just like any major managers," he notes.

JUST ANOTHER CLIENT?

To the 100 Wall Street securities firms HMC deals with, Harvard is "just another client," on par with other multi-billion dollar fund managers, such as Putnam Mutual Fund in Boston which handles $25 billion.

But instead of maneuvering around private pension funds, the 102-member staff at HMC guards a portfolio that pays professors' paychecks and student financial aid. Twenty percent of the return on investments in 1984-85 helped bankrolled the University's $650 million budget, while the rest was reinvested.

In recent years, the endowment income has begun accounting for a lower proportion of the University's budget. As a result, tuition has risen and begun accounting for a larger segment of the budget. Over the last 10 years, HMC reinvested income on the endowment to to help offset the inflation rate, but at the same time University expenses were growing and outstripping the amount of endowment income allocated to the general budget. The endowment, which paid for 22 percent of the University's expenses in 1974, only funded 18 percent last year. Tuition increases above the rate of inflation have had to make up the difference: in 1974, tuition paid for 21 percent of the University's expenses and last year, 26 percent. Next year, dergraduate tuition will rise by 6.9 percent compared to the 1985 4 percent inflation rate and the current negative inflation.

In letting tuition pay for a larger part of expenditures, Harvard's money protectors are trying to keep the endowment growing at a stable pace and hedge for a time, of higher inflation for example, when Harvard might need more money from the endowment. "We could spend more from the endowment and reduce tuition, but we have to spend for the long haul," says Financial Vice President Thomas O'Brien.

The need to protect the endowment's purchasing power from market and inflation fluctuations can also guide the way Harvard invests. "Universities live to a certain extent off endowments," says Nicholas Potter, head of investments for J. P. Morgan and Company. "They take a different approach than pension funds and tend to be more conservative because they can't take risks in the long term."

But that doesn't slow down the action at HMC headquarters. "[HMC] has been know to take risks," says Stanley's Hilzenrath. "They're smart people who do a lot of sophisticated trading in common stocks and options--which fits the kind of business we're in."

ON THE JOB