The investors at the Harvard Mangement Company (HMC), whose double-digit returns over the past decade have consistently outpaced the rest of higher education, may be unmitigated stars in their field.

But their magic has increasingly come from money managers outside the company, forcing the University to consider the possibility of entirely external management of the endowment.

For all the lavish praise—and money—bestowed upon the managers of Harvard’s esteemed $19.3 billion endowment, nearly half of the University’s investments are actually made by external managers who are not on the Harvard payroll and do not report directly to the University.

These managers, often former investors at HMC, operate independent funds endowed with Harvard money. Jeff Larson, a top investor at the management company, will become the fifth fund manager in six years to spin off his own fund from the company when he departs on June 30.

Sowood Capital Management, Larson’s $2-billion hedge fund, will receive an initial investment of $500 million from HMC. Harvard will also invest $200 million in an exclusive commodities fund operated by Larson. All told, the spin-off will place around an additional 3 percent of the University endowment in the hands of an external manager in a trend which shows no signs of abating.

HMC President Jack R. Meyer spoke more openly this year than ever before about the possibility of moving to entirely external management of the endowment, acknowledging that more fund managers were likely to leave HMC in future years and spin off funds of their own.

“It could be that we will eventually move to the same external system that other schools use,” Meyer said in April, referring to universities such as Yale and Princeton, whose enormous endowments nonetheless trail Harvard’s by billions of dollars.

With 45 percent of the endowment managed outside of Harvard, HMC still controls the majority of its investments. But at a certain point—and Meyer won’t speculate when—the University could be better off disbanding HMC and handing over control of its endowment to managers unaffiliated with the University.

The endowment, which stood at $19.3 billion as of June 30, 2003, is consistently the envy of higher education. And HMC stunned institutional investors this past September when it announced gains of 12.5 percent for fiscal year 2003, tripling the median return for large funds.

The management company’s stellar fiscal year reinforced its status at the helm of institutional investing. Over 10 years, HMC has posted an average annual return of 14.7 percent.

BLOATED WALLETS

But along with HMC’s dominance has come increased scrutiny from the media, outside watchdogs and concerned alums. Specifically, critics have targeted the gigantic salaries paid last fiscal year to the management company’s top investors, two of whom received over $30 million in salary and bonuses each while the University, citing a fiscal crunch, laid off workers across campus and raised College tuition by 5 percent.

Last fiscal year’s particularly high compensation for Harvard’s fund managers came almost entirely in the form of performance-based bonuses which soared along with the endowment and brought significant windfalls to managers who had far outperformed their benchmarks.

Seven members of the Class of 1969 objected to the fund managers’ salaries in a series of letters to University President Lawrence H. Summers beginning in December.

The University has often dismissed the compensation issue, which plagued them all year long, calling it the product of a media echo chamber rather than a reflection of public opinion.