Miami University is becoming increasingly involved in investing excess money from taxes, tuitions and other sources into hedge funds. According to a Nov. 25 article from The Columbus Dispatch (“Hedge funds a risk for colleges”), these unregulated private investment pools have been receiving criticism due to their use of high-risk methods in hopes of receiving large capital gains.
Miami University chair of the department of finance, Steve Wyatt, explained that there is no exact definition of a hedge fund. They can be described as professionally managed investment portfolios that are only open to a limited number of qualified investors, but there are many ways to define them.
“It is hard to classify hedge funds as a group,” Wyatt said. “They’re like snowflakes. It all depends on the manager and their strategies.”
Miami University has been investing in hedge funds since 2002 after a change to Ohio law, and they now hold about 16 percent of Miami’s total investment portfolio. Miami uses privately funded endowments and surplus money from taxes and student tuition payments to invest in these funds.
According to The Dispatch article, Ohio State University has also become heavily involved in investing money into these unregulated funds. In the past year, the university has doubled its investments in the funds to $335 million-about 14 percent of its total investment portfolio.
According to the CNNMoney Web site, in 2005 Yale University received a 22.3 percent return on its $15.2 billion endowment, as a result of its use of hedge funds.
Although the payoff of using hedge funds may be receiving higher, and more stable, returns, The Columbus Dispatch article explains that some crash. After Sowood Capital made poor investment decisions in July, Harvard University lost $350 million of their endowment.
According to Bruce Guiot, director of investments and treasury services at Miami, hedge funds that have grabbed headlines because of failure have been highly leveraged-meaning investing borrowed money. Guiot assured that Miami’s hedge funds are not leveraged, and therefore safe.
“Part of Miami’s process is using little or no leverage in their strategies,” Guiot said. “The strategy is geared towards stable and consistent rates of return, not outsized returns.”
According to Guiot, Miami’s objective in investing in hedge funds is to receive equity-like returns with bond-like volatility. Therefore, receiving higher return rates with lower associated risk of loss.
“The term ‘hedge fund’ is very generic,” Guiot said. “It means different things to different people, and although you can never be completely risk free, the university is using hedge funds in order reduce its risk.”
Miami uses an investment consultant in order to help with the due diligence work associated with hedge funds. The consultant does research work, record keeping and helps to identify and monitor hedge fund managers. With an investment consultant, Miami is making sure that all aspects of its investments are closely observed.
Although university use of hedge funds has been receiving criticism due to the high-risk strategies that they employ, according to Guiot, Miami University is looking for consistency rather than substantial returns.