If global hedge fund Amaranth's collapse had occurred in April rather than September, Duke would have been among the investors watching $6 billion go up in smoke.
But thanks to careful monitoring of the hedge fund and canny foresight on the part of Duke Management Company, the University managed to escape unscathed, DUMAC officials confirmed.
Duke's initial 2003 investment of $20 million in the Connecticut-based hedge grew to a peak of $85 million. But in June 2005, DUMAC financial managers began to liquidate the school's assets in Amaranth, receiving the last installment of the proceeds in May 2006-just months before the hedge fund's crash.
Avoiding the Amaranth disaster is just the latest example of the success DUMAC has enjoyed since its inception in 1990 as the independently owned management firm that handles Duke's investments.
DUMAC is responsible for investing $7.5 billion in long-term holdings, such as the University's endowment and employee pension funds. During the past 10 years, the Duke endowment's rate of investment return has been the second highest in the country among institutions of higher education, just behind Yale University's, DUMAC officials said.
For the past three fiscal years, the University's rate of return on its investments was 18 percent. Last year, the return hit 20.2 percent, putting Duke third, behind the Massachusetts Institute of Technology and Yale, officials said.
A 1-percent increase in investment returns adds more than $50 million to the University's budget, Executive Vice President Tallman Trask, member of DUMAC's board of directors, wrote in an e-mail.
"DUMAC has done a remarkable job with the University's investment portfolio, both recently and over the past two decades," he said.
Why Duke didn't lose to Amaranth
While still in its early days, DUMAC focused on venture capital opportunities. It began to invest in hedge funds like Amaranth in the mid-90s. To counteract losses from the burst "telecom bubble," DUMAC increased hedge fund investments, officials said.
Hedge funds are private investment institutions known for having fewer restrictions on managers and diverse investment strategies.
The greatest risk associated with hedge funds is that they are not required to disclose information about specific investments to their investors, said Connel Fullenkamp, associate professor of the practice in the economics department.
DUMAC officials said Amaranth was more transparent than other hedge funds, and that, through routine monitoring, DUMAC managers saw the danger of this "multi-strategy fund" that was becoming concentrated in energy trading.
The disproportional weighting of Amaranth's investments, as well as concerns over rapid asset growth and personnel turnover, led DUMAC to the nine-month process of liquidating its holding in the fund.
DUMAC's ability to closely monitor hedge funds is unusual, because access to specific hedge fund investment is often limited to large investors with a great deal of clout, Fullenkamp said.
"It's a lot about having relationships and connections to know people in the industry and to be privy to information that is just not really known," he added.
Fullenkamp praised DUMAC managers for their astute decision-making.
"They should get more credit for disciplined investing than for being able to forecast the future," he said. "They were exercising good judgement-that's what they should really be commended for."
Interpreting DUMAC's success
The University's endowment, small relative to those of other top-tier universities, could be advantageous to its investment returns, said David Hsieh, a finance professor at the Fuqua School of Business.
According to the 2005 endowment study from the National Association of College and University Business Officers, Harvard University held the nation's highest endowment-approximately $25.5 billion. Duke's endowment of approximately $3.8 billon ranked 16th.
Hsieh said Duke's smaller pool of available dollars may have contributed to its high rate of investment return.
"The more money you have, the harder it is to do really well," he said. "You have to find a lot of good opportunities. Having a small endowment means you don't need as many of the opportunities."
DUMAC is a relatively aggressive investor, willing to take risks in alternative exposure and illiquid assets, representatives said, adding that their policy on hedge funds has not changed since Amaranth's collapse.
"The Duke endowment is so large, and they don't have any selling deadlines or selling pressures," Fullenkamp said. "They have a very long-term perspective that allows them to take on much higher risks than most individuals or even most other financial companies can take on."
Trask attributed DUMAC's success in part to aggressive investments in private equities more than a decade ago, which generated high returns around 2000. He said recent results have been related to "very good calls on asset allocation."
Fullenkamp said, however, a measure of financial strength more important than the size of a university's endowment may be the amount of money generated for initiatives such as infrastructure improvements and financial aid.
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