Are Hedge Funds Detrimental to College Idealism?

College endowments are much flashier than they used to be. They frequently reach into the billions of dollars; they attract top investing talent; and, most notably, the majority of their money is in "alternative" investments like private equity and hedge funds. Is this hurting students' ability to be proper idealists?

It's not just a theoretical question. The entire premise of colleges putting so much of their money into hedge funds and other instruments that charge very high fees in return for performance that is often subpar is worth questioning on financial grounds alone. Unlike more workaday institutions, though, colleges also have responsibilities that go above and beyond maximizing earnings— they're expected to live up to all those philosophies and righteous aspirations that they teach to all those students. How they invest their endowments, therefore, becomes a political question in addition to a financial one.

College students are not known for their firm grasp of finance. But their idealism is one of their best traits. Student-led divestment campaigns, for example, pushed many schools to pull their money out of apartheid South Africa. Such campaigns can have real positive social effects. The latest divestment campaign seeks to get colleges to divest themselves of holdings in fossil fuel companies, for the sake of the environment. We won't argue the merits of that specific cause here. More interesting is the larger debate over whether divestment is a more effective tool than proxy campaigns— that is, can colleges accomplish change better by pulling their money out of companies, or by keeping their money in, which gives them a voice with which to push for change from the inside, as a financial stakeholder? Consider this nugget from today's New York Times story on the fossil fuels campaign:

Jon Lukomnik, a corporate governance consultant, said college endowments’ ability to use the proxy process had been curtailed by their increased holdings in alternatives like private equity, venture capital, real estate and hedge funds. That trend has left “an ever decreasing portion of their assets” in publicly traded stocks.

At Harvard, the number of proxy proposals on social issues that its shareholder responsibility committee has considered has fallen from a recent peak of 157 in 2004 to 41 in 2012.

Since colleges have most of their money in alternative investment funds, and since those funds are widely diversified and have many holdings outside of the stock market, they have less clout with individual companies. In other words, the divestment vs. proxy question may be becoming a moot point. Thanks to their love affair with hedge funds, colleges may be losing their ability to effect social change through financial leverage, even if they wanted to.

Something for students to think about: a new campaign to reduce colleges' reliance on hedge funds. Divest from scams.

[Photo: 350/ Flickr]