Wealthy College Endowments Beat the Stock Market

Their billions in tax-free funds earned 21.3 percent in the past fiscal year.

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Others worry that the pressure to keep reporting such record-breaking profits is pushing many endowment managers to take questionable risks. Fred Fahey, a Massachusetts-based real-estate developer, says he is a victim of universities' drive for higher profits. In a lawsuit filed in a Massachusetts state court, he alleges that a partnership funded by Harvard, Yale, Princeton, and other nonprofits charged him the equivalent of about 40 percent annual interest for a loan to fund a golf-course housing project. Fahey couldn't repay the loan at that high rate and ended up losing the project to the partnership. "I can see how they get those returns," he says.

The colleges have replied that since they were limited partners, they are not responsible for the partnership's actions. Endowment officials say they adhere to ethical standards for their investments and that a portion of the alternative investment profits has gone to good causes, such as increasing financial aid.

Whatever the merits of Fahey's case, many students are concerned that it reveals a larger, long-hidden problem with endowments. Morgan Simon, executive director of the Responsible Endowments Coalition, says that many colleges refuse to reveal how they invest their funds, making students worry that the profits may be coming from, for example, companies like PetroChina. That company, which has operations in Sudan, returned almost 80 percent in 2006 and an additional 30 percent in 2007. What's more, if colleges stake too much money on oil wells and oil companies, "they aren't dealing with global warming, and that, in the long term, is a bad investment," Simon says.

And bad endowment investments, after all, are bad for students, too, because colleges typically pull out about 4.6 percent of their endowments to spend on better dorms, better professors, and bigger scholarships.