HMC was born out of Harvard’s decision in the early 1970’s that it needed a radical change in its investment strategy, after a decade of stagnating returns when the growth of Harvard’s endowment barely kept pace with inflation, growing only about 25 percent.

Even so, Harvard needed to ensure that the University’s resources, scale and the size of the permanent endowment would allow it to thrive in the competitive market before it created its own investment company.

“It does take scale, and there aren’t a lot of universities that have endowments large enough to make [internal management] work,” says former HMC investment manager Scott Sperling.

When HMC was created, Harvard was unique in the national field. And even now only a handful of universities—Yale, Princeton, Stanford, and the University of Texas, among others—have internal investment managers.

“In Harvard’s case, they’ve made it work, but there were times when it looked like it wouldn’t... It’s taken a lot of time to get comfortable,” says John S. Griswold, senior vice president of The Commonfund, a mutual fund for institutional investors that was established three years before HMC and currently manages over $26 billion for more than 1,400 colleges, universities, and foundations.

But Harvard has never used The Commonfund. With a significantly larger and more diverse endowment than most other schools, Harvard is a giant among giants, which thinks that regular investment techniques are just not good enough.

“The basic reason is that they’re different,” Griswold says. “They feel they are able to invest in a way that will return them above average returns.”

Harvard faced a unique challenge when it opted to take its endowment private, with little precedent on which to base its decision.

Harvard’s endowment is far more diversified than schools like the University of Texas, which has accumulated its $7 billion endowment thanks largely to land grants and Texas-based oil interests. A gift of Coca-Cola stock makes up almost half of Emory’s endowment. But because the scope of Harvard’s portfolio is so wide, Harvard has an increased need for shrewd and decisive investment.

When Walter M. Cabot ’55 set up HMC in a giant glass-paneled office on the 26thfloor of the Federal Reserve Building in downtown Boston, he began a term as president and CEO that would last for almost two decades.

Under Cabot’s watchful eye, Harvard’s endowment grew from one to five billion dollars, thanks largely to a radical move into aggressive investment in private equities known in the industry as “alternative assets”—venture capital, oil and gas futures and real estate.

At the time, many industry experts considered HMC’s move risky, but Cabot recognized that the endowment’s long-term view could withstand the day-to-day volatility of the market.

“The question of how best to invest an endowment is different from the normal institutional investor,” says Robert M. Pease, senior editor of Private Equity Analyst, a Wellesley-based industry newsletter.

“If you look at a pension plan, they have to match assets and liabilities over the short, medium, and long term, whereas an endowment is primarily interested in the long-term growth,” he says.