14th July 2013: Tax-Exempt Universities & Alternative Investment Property

I’ve spent part of the last year reading about David Swensen‘s Yale model of university endowment investing. Swensen’s Pioneering Portfolio Management (New York: The Free Press, 2009)  popularised the asset allocation of so-called alternative investments — hedge funds, private equity, property, timber — for their alpha generation. According to Felix Salmon, tax exemption laws likely shape Swensen’s asset allocation decision:


Still, in an ideal world, Cooper Union wouldn’t get this tax break — and neither would NYU be exempt from paying property tax on its buildings, and neither would Harvard be able to invest its endowment tax-free. The tax exemptions that universities receive cause them to behave in a manner which would otherwise be quite irrational: NYU’s expansionism, for instance, is driven in part by the fact that it can extract more economic value out of property than other actors, thanks to all property it buys automatically becoming tax-exempt. And if you look at Harvard’s balance sheet, it has for decades now been a hedge fund with an educational institution attached, the educational institution more than paying for itself in the tax exemption it confers upon the entire endowment. [emphasis added]