Many universities across the United States are cash-strapped because they have prioritized paying high fees to hedge funds—largely unregulated, high-cost investment vehicles run by the ultra-wealthy—while asking students, faculty and staff to pick up a bigger part of the tab, an explosive new report shows.
The report, "Endangered Endowments: How Hedge Funds Are Bankrupting Higher Education," released Feb. 8 by the AFT and the Hedge Clippers campaign, is the first of its kind to examine the harmful influence of hedge funds in higher education endowments. It exposes a troubling trend that has emerged over the last decade: Hedge funds are managing larger portions of endowments and charging high fees for poor returns. The result is increased wealth for hedge fund managers and potential income loss for colleges—which in turn means higher tuition, fewer resources and reduced accessibility for students.
Universities now face a choice, the report claims: Either continue to reward hedge fund billionaires set on siphoning money out of the higher education system, or divest from hedge funds entirely.
Key findings of the report include:
- Hedge funds collect billions of dollars in fees from U.S. colleges and universities—and produce little in return. Hedge funds collected an estimated $2.5 billion in fees from university endowments in 2015 alone, even though 2015 was reportedly the worst year for hedge fund performance since the financial crisis.
- Hedge fund managers take up a disproportionate share of seats on college and university boards, influencing the endowments to make larger and riskier allocations to hedge funds. The average university endowment has nearly 20 percent of its pool allocated to hedge funds, and some universities now have upward of 40 percent of funds in this single asset class.
- Hedge fund managers make large, tax-free donations to private endowments, placing a huge burden on taxpayers and driving inequality within the higher education system. Hedge fund managers often make headlines for giving large sums of money to university endowments, yet these donations are almost exclusively aimed at rich Ivy League institutions, not the public institutions that serve the majority of low- and middle-income students.
- Hedge funds invest endowment funds in an array of harmful industries and use the investment gains to further a political agenda that harms students and communities. Hedge funds have a pattern of investing endowment funds in problematic companies and industries that destabilize communities and environments across the globe, from fossil fuels, private prisons and pharmaceuticals, to foreclosed homes, student debt and for-profit universities.
"Michigan State University's mission is to allow students who would not have been able to afford private education a chance at higher ed," says Kelly Stec, vice president for contract enforcement at the Graduate Employees Union at MSU. "To know that so much of our endowment is placed in hedge funds is horrifying to me." MSU is one of the schools singled out in the report for investing more than 40 percent of its endowment in hedge funds. "To risk money that is meant for improving this university is to go against every value that MSU was founded on."
"Universities suffered huge losses during the great recession because of their investments in risky, high-fee investment strategies," says Bob Samuels, president of the University Council‒AFT and a lecturer at UCLA, another of the heavily invested schools. "It looks like many institutions are gambling on the future of their institutions, students and faculty again."
"This report exposes hedge fund managers for what many of them are—financial vultures looking to use their extreme wealth and power to gamble away higher education institutions' endowments, while charging unconscionable fees for their flawed advice," says AFT President Randi Weingarten. "These billionaires have rigged the economic system for their benefit, and continue to prevent working people and the institutions that serve them from bouncing back after the worst recession of our lifetimes."
The AFT is demanding a full accounting of hedge fund fees and returns, to determine whether hedge funds truly provide value relative to their high cost.
[AFT/Hedge Clippers press release/photo courtesy Hedge Clippers]