Just to show how quickly things move in the blogosphere we already have some follow-up items to yesterday’s post:  The curious case of hedge funds during the financial crisis.  In that piece we cited an article, “Rich Harvard, Poor Harvard” by Nina Munk at Vanity Fair (which is now online in full).  In that article she discusses the financial pressures Harvard University has come under due in no small part to some bad interest rate bets by Harvard’s former president Larry Summers.

Joe Weisenthal at Clusterstock details the shrinkage in the endowments at both Harvard and Yale.  The implicit story being that alumni will need to step up to the plate to help these institutions.  The problem at Harvard is the rise in interest rate expense.  That interest coming from bonds issued to help cover some holes in the Harvard budget.

The Epicurean Dealmaker has a post up that shows the lengths to which Harvard went to “hedge” its future interest rate costs.  The problem being that Harvard in trying to hedge borrowings which had not even occurred was in fact speculating on interest rates.  TED writes:

Entering into a forward start swap for debt you do not intend to issue up to 20 years in the future sounds like either rank hubris or free money for Wall Street swap desks.

There is some speculation amongst Beltway-types that Larry Summers is being considered to take over as Federal Reserve Chairman when Ben Bernanke’s term is up in 2010.  Whoever still advocates this should read up on Summer’s disastrous turn at Harvard.

Were it not for the need to continue funding their private equity investments Harvard and their elite endowment brethren should be cleaning up on their hedge fund investments.  Hedge funds are in a certain sense back.  Gregory Zuckerman at the WSJ who writes:

Hedge funds are enjoying their best period in a decade. One reason: Wall Street firms are pulling back from their own “proprietary” trading, meaning less competition.

Douglas A. McIntyre at 24/7 Wall St. notes the quick resurrection in hedge funds.  Despite being only a few months removed from disastrous performance investors are jumping back into hedge funds.

The improvement in the prospects of hedge funds is a reminder of how short the memories of investors can be. March was as bad a month as most investors had experienced in a generation or longer.  March is only a little over 100 days gone.

As we discussed in our post the hedge fund model has emerged on the other side of the financial crisis largely intact.  This allows hedge funds to benefit from heightened investor demand.  It is ironic that Harvard is now being shown to be a casualty of the financial crisis.

As noted in the Vanity Fair piece Harvard excelled for some time in managing its own hedge fund-like portfolios.  The endowment had to pull back from this practice when its compensation practices came under fire.  The idea of paying hedge fund-like compensation to managers who had no ownership and none of their own capital at risk rankled many in the Harvard community.

This principle of connecting fund performance, compensation and ownership may be the reason why the hedge fund model survived.  It provides both the manager and investor some sense that they are in the same performance boat together.  When you try and shoehorn a hedge fund compensation model into a non-profit like Harvard or a larger financial services institution like an investment bank there will inevitably be tension.

Maybe that is why it makes sense to apply the hedge fund model more widely across the financial services industry.  Let risky strategies and portfolios be managed by managers who have ownership and some proverbial skin in the game.  Let those institutions who have either an implicit or explicit guarantee from the government become ‘de-risked.’