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Financial Times, January 26, 2009 article


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Financial Services

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 the crisis.

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.

Fortress, Goldman Sachs, Microsoft, 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 ways.

“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 going.”

He said the $17bn Yale endowment was shifting as much available money as possible into distressed debt.




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