H is for Hedge Fund

These days, Harvard University looks more like a sophisticated hedge fund than it does an institution for higher education. Its massive endowment, which is now close to $35 billion, earned a 23.0 percent return during the fiscal year ending June 30, 2007. The size of the Crimson endowment puts Harvard in a class by itself. Number two ranked Yale has an endowment of $22 billion -- more than a third less than its Ivy rival.

There are many points of view about what Harvard should do with all of this money. The most popular choices appear to be: 1) eliminate tuition for all students; 2) raise the hourly wage for employees of the Harvard Corporation; and 3) self-fund more faculty research. These are rather obvious and uninspired ideas. Here is a big idea with a bit more impact and creativity.

Harvard should acquire one of the top rated, but chronically underfunded, historically black colleges. Most of these black colleges are in desperate need of additional resources to fulfill their academic and social commitment. Spelman and Morehouse -- two well known, resource rich and highly rated colleges whose student population is predominantly African American -- are the exceptions to this rule. Spelman and Morehouse have sizable endowments and the support of well-heeled celebrities such as Oprah Winfrey, Bill Cosby and Spike Lee. The same cannot be said for other historically black colleges such as Clark Atlanta University.

Clark Atlanta faces the more typical financial challenges associated with these small colleges. Its endowment is tiny -- only $40 million. The college itself is small -- 235 faculty members and 4275 enrolled students. With an endowment less than one-tenth of a percent of Harvard's, Clark Atlanta lacks the scale, resources and momentum to ever propel itself into financial prosperity.

Despite these challenges, Clark Atlanta is a good school with committed students, faculty and administration. I saw this first hand when I served as an advisor to the business school. Imagine what a school like Clark Atlanta could do if it benefited from the Harvard resource base.

Clark Atlanta could thrive as a "tuck-in" acquisition for Harvard. Why not imagine Clark Atlanta as another Radcliffe -- uniquely focused on its mission of educating African Americans, while taking advantage of Harvard's vast resources, infrastructure and best practices. If the term acquisition scares you, then how about a strategic alliance or an outright gift from Harvard to Clark Atlanta.

Such an acquisition or alliance is not as outlandish as it seems. Schools like Clark Atlanta serve an important and unique societal purpose that Harvard on its own would never be able to fulfill. In partnership, just imagine what Clark Atlanta could do with say a $1-2 billion investment from Harvard. Clark Atlanta could do what Harvard is considering doing -- eliminate tuition, pay staff more and fund more research -- but with a far greater societal impact than anything that might happen up north in Cambridge.

There is a big difference between Berkshire Hathaway (the investment company controlled by investor Warren Buffet) and the Harvard endowment. Both are professionally managed investment portfolios with public company holdings, emerging-market equities, commodities, stocks, real estate, high yield assets and so on. The big difference is that Berkshire Hathaway exists to create value for its shareholders, while Harvard exists to serves a much higher calling. Unlike Berkshire Hathaway, the financial value of the Harvard endowment is a means not an end.

The H in Harvard should stand for higher education, not hedge fund investing.