Top investor calls for Wall St ‘moderation’
By Deborah Brewster in New Haven
Published: January 25 2009 20:25 | Last updated: January 25 2009 20:25
The financial crisis has exposed greed,
predatory behaviour and conflicts of interest in Wall Street banks and
investment firms, one of the top investors in the US has said.
David Swensen, the chief investment officer
of Yale University’s endowment who has achieved near-legendary fame, said he
hoped some “moderation of compensation” on Wall Street would be a result of
He said: “Even if the returns they generated
were real, they were paid too much, and in the context of the absolutely
disastrous performance of these institutions their pay was obscene”.
In the 10 years to June 2008, Yale’s
endowment returned an average of 16.3 per cent a year after fees. That is
almost three times the return of the average college endowment.
In the 25 years since he took the helm, Mr
Swensen turned the traditional endowment model, which had 80 per cent of the
money in US stocks and bonds, on its head, putting most of the money into
private equity, hedge funds, non-US securities and property.
In spite of allocating money to 100 managers,
he is highly critical of the money management industry.
Mr Swensen recently revised his book –
Pioneering Portfolio Management – that outlines his philosophy
and packed it with recent examples of venality.
Morgan Stanley and large buy-out funds are among those which he
criticises for self-interested actions at the expense of their investors.
He said: “Look at investment banks and how
they price swap transactions. Instead of being symmetric and using the same
discount rate when selling and buying, they will say that on the cash flows
you owe us, we’re going to use a low discount rate, and on the cash flows we
owe you, we’re going to use a high discount rate.
“It’s stunning that anyone could say
something like that with a straight face.
“This bad, predatory behaviour – unilaterally
changing marks, asking for more collateral, etc – it seems the financial
crisis stripped off this veneer and caused them all to behave in more venal
“The overwhelming number of investors fail
because the fees charged by the investment management industry are egregious
relative to the amount of value that is added. It is really quite stunning.“
Mr Swensen said nobody should use hedge funds
of funds, which take investor money and, for an additional fee, allocate it
to a range of hedge funds.
“You can’t make sensible investment decisions
with fund of funds or consultants. Madoff is just a great example of the
dangers of making an investment and not understanding where the money is
He said the $17bn Yale endowment was shifting
as much available money as possible into distressed debt.
Financial Times Limited 2009