The recent ups and downs of the world markets have proven even Harvard's investors to be mortal.

The University's endowment, quoted at an all-time high of $13 billion at the end of June, has since lost $1.3 billion or 10 percent of its value, over the last two and a half months.

And officials at the Harvard Management Company (HMC), the wholly-owned subsidy which manages University's investments, said the immediate future does not look bright.

"We do not expect a quick return to stability," HMC reported in its annual letter. "We are prepared for the possibility that things will get worse before they get better."

Following on the heels of five consecutive years of higher-than expected endowment growth, the drop over the last two-and-a-half month period was 3 percentage points below HMC's benchmark. The group forecasted a drop of only 7 percent.

"The only thing I'm really worried about is that three points," said Jack R. Meyer president and CEO of HMC in an interview yesterday. "It is unusual for us to under-perform." Meyer said HMC aims to outperform the benchmarks even in down markets.

The Standard & Poor's 500 and the Dow Jones industrial average both declined by about 10 percent between July and mid-September, roughly the same drop as Harvard's endowment.

University officials blame the recent stock market turmoil, not losses in alumni giving or difficulties with the Capital Campaign, for the 10 percent decrease. Meyer singled out two major HMC strategies that have aggravated the endowment's decline.

Harvard invested 9 percent of its assets in emerging markets, including holdings ,in Russia, which fell sharply over the last fewmonths.

Meyer refused to comment as to whether HMC wasdeviating from its policy portfolio, whichdictates how HMC distributes its investmentsacross asset classes, in response to emergingmarkets' poor performance.

Also, the University invests some of its assetsin the same equities and in a manner similar tohedge funds, private investment funds, whichperform risky trading in options and otherderivatives. As markets have dropped, these fundshave been forced to liquidate their positions atdistressed prices, lowering the value of Harvard'sassets.

Over the last five years, Harvard's endowmentgrowth has--year after year--outperformed itsbenchmarks, which are calculated from nationalfinancial indicators by the company's board ofdirectors. After three years of high annualreturns between 20 and 26 percent, Meyer hinted atthe possibility of zero or even negative returnsfrom Harvard's general investments this fiscalyear.

"My guess is that we'll get most of it, if notall of this back, by the end of the year," Meyersaid.

For the moment, Harvard investors plan to ridethe roller coaster and focus on the University'slong-term financial situation.

Both Meyer and Vice President for FinanceElizabeth C. "Beppie" Huidekoper said yesterdaythat Harvard does not plan to cut spending inresponse to the endowment drop.

Huidekoper said the University would begin totrim its endowment spending only after fiveconsecutive years of negative returns on the scaleof the recent losses. She added that Harvard couldtap into the surplus revenue from the past severalyears of high endowment growth.