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.

An abundance of press coverage examining the managers’ salaries have dogged administrators and press officers at the University, but it remained unclear whether the seven-member clan of alums who drew so much media attention this year represented a broader opposition to compensation policies at HMC.

In an April interview, Vice President for Finance Ann E. Berman said the compensation issue had been blown out of proportion by media coverage. And Joe Wrinn, the University’s chief spokesperson, agreed enthusiastically, having spent the school year personally dealing with inquiries into the HMC policy.

But the Class of 1969 alums were joined this year by student and worker activists on campus, who frequently referenced the fund managers’ salaries at rallies protesting layoffs across the University.

A dozen students and Harvard employees stood in the rain outside Lamont Library in April to protest an appearance there by Meyer.

“Lay off Jack Meyer and save millions of dollars annually,” yelled Tom Potter, a faculty secretary at Harvard Law School.

Bowing to some of the mounting pressure, the HMC board voted in March to lower the maximum compensation for its fund managers. Summers told The Crimson that the new caps would prevent payouts on level with last fiscal year.

Still, those objecting to the salaries would like to see far greater steps. William A. Strauss ’69, who has led the group of alums protesting the salaries, said he believed fund managers should be paid no more than the University president.

Summers received $681,735 in salary and benefits last fiscal year.

CASHING IN ON THE ENDOWMENT

As the compensation issue played out loudly in local newspapers, Harvard quietly began an entirely separate program intended to boost gifts of charitable remainder trusts by allowing donors to attach those trusts to the University endowment.

Charitable remainder trusts, in their most common form, allow donors to place money in a fund which pays a set rate to the donor each year. And upon the donor’s death, the entirety of the fund is donated to the charitable organization of one’s choice.

Harvard has long offered the option of charitable trusts for its donors, but sluggish returns made the program less appealing. Thanks to a special ruling by the Internal Revenue Service, however, Harvard began allowing its donors with charitable trusts to attach those funds to the University’s lucrative endowment in the hopes of greater returns for both the donor and Harvard.

In the first few months under the new option, 70 percent of eligible trust holders—some wooed by an advertising campaign in Harvard Magazine—made the switch to the endowment, representing over $200 million in trusts.

—Staff writer Zachary M. Seward can be reached at seward@fas.harvard.edu.