Saturday, December 1, 2012

Harvard's Merger Arbitrage, Endowment Investing

Apparently Harvard (or more specifically, its endowment) engages in merger arbitrage. Taking a 5.77% percent stake in Teavana Holdings, Inc. (NYSE:TEA) after it agreed to be acquired by Starbucks (NYSE: SBUX), Harvard now owns 2,240,000 shares valued at roughly $33mm as of TEA's closing price on Friday. With a portfolio valued at over $30 billion, this represents ~0.1% of the total endowment and therefore ~0.6-0.7% of the ~15% "absolute return" portion of the endowment. It is far from large for Harvard, yet makes it one of the largest holders of TEA.

It can do this because Harvard operates an active, "hybrid" investment model. Unlike most endowments such as Yale, Duke, MIT, etc., Harvard Management Company (HMC) has external as well as internal managers to handle its investments. This has has indeed turned parts of HMC into a hedge fund, spinoffs and all. In particular, Convexity Capital Management (founded in 2006 by the Jack Meyer, former head of the endowment) shows some of the more complicated options/swaps-based strategies that were employed, discussed here.

But what about other methods of investing for endowments? This article from Greycourt & Co. looks to the (equity) index approach take by Norway's sovereign wealth fund, which does the "anti-Yale" approach in investing mostly in passive, liquid indices and has still done with. One possible explanation given is that 1) Yale's focus on alternatives (mirrored by Harvard now) was done when illiquid assets were cheap/undiscovered, hence their legendary returns under David Swenson. As a result, recent lackluster returns by large endowments focused on alternatives (real estate, hedge funds, private equities) may be a function of over-interest.

What can we gain from this? Maybe, it's that like anything else in investing, no asset class always does better and outperformance is ultimately driven by value. 

Disclosure: I am short TEA.

-Stanley

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