The sub-prime mortgage market is in shambles. But Wall Street, making every effort to rid itself of risky mortgage-backed securities, has found a new group of potential buyers -- university endowments.The Wall Street Journal reported (subscription required) that university endowments have started to dip into the risky world of buying sub-prime mortgage debt. An opportunity recently stemmed from two money-losing hedge funds at Bear Stearns (NYSE: BSC), and one that required loans from various banks to halt the seizure of the fund. Merrill Lynch & Co. (NYSE: MER) a lender to these funds, auctioned some assets it had seized from Bear for $850 million. However, the auction sold for less than half that amount, according to people familiar with the matter.
Lou Morrell, vice president for investments and treasurer at Wake Forest University in Winston-Salem, N.C. is quoted as saying he sees value in those auctions. "There's an opportunity out there to buy these loans at a discount," he told the WSJ, and that "will be popular with a lot of endowments out there." The university is placing $25 million of its $1.2 billion endowment with a hedge fund to invest in sub-prime mortgages.
They're not the only ones dealing in big risk either.
Bill Spitz, CIO for the Vanderbilt University endowment, which contains $3.4 billion, told the WSJ that his fund currently has a "negligible" amount of money in debt backed by sub-prime mortgages, but has earmarked $50 million to invest in such securities. "What typically happens when there is a scare of this sort, people disgorge assets quickly and they sink to a level below their true value," Mr. Spitz is quoted as saying. "That creates opportunity."
In comparison to other investors, university endowments continue to show a greater preference for risk. According to the WSJ article, the top 53 university endowments, with around $217 billion in assets, have almost 18% of their money invested into hedge funds, according to industry-watcher HedgeFund Intelligence. By contrast, the average pension fund has around 5% in hedge funds.
But what does that really say about these university endowments? University endowments have always been involved with risky investments, according to Allen Procter, a private consultant in Ohio and the former CFO at Harvard University. "Universities have the financial structure that encourages alternative investments, and this leads to a culture with a greater tolerance and understanding of risk." In the past, endowments turned to high-yield "junk" bonds and oil- or -gas-well leases, Procter told the WSJ.
Despite all the taste for risk, not all endowments are looking to own bonds backed by sub-prime mortgages. The University of Richmond in Virginia, which HedgeFund Intelligence says that nearly half of its $1.6 billion endowment is in hedge funds, will not invest in sub-prime. "We don't think it's something we want to play," chief investment officer Srini Pularvarti told the WSJ.
Kevin Shult is a writer for Theflyonthewall.com (subscription required)
In comparison to other investors, university endowments continue to show a greater preference for risk. According to the WSJ article, the top 53 university endowments, with around $217 billion in assets, have almost 18% of their money invested into hedge funds, according to industry-watcher HedgeFund Intelligence. By contrast, the average pension fund has around 5% in hedge funds.
But what does that really say about these university endowments? University endowments have always been involved with risky investments, according to Allen Procter, a private consultant in Ohio and the former CFO at Harvard University. "Universities have the financial structure that encourages alternative investments, and this leads to a culture with a greater tolerance and understanding of risk." In the past, endowments turned to high-yield "junk" bonds and oil- or -gas-well leases, Procter told the WSJ.
Despite all the taste for risk, not all endowments are looking to own bonds backed by sub-prime mortgages. The University of Richmond in Virginia, which HedgeFund Intelligence says that nearly half of its $1.6 billion endowment is in hedge funds, will not invest in sub-prime. "We don't think it's something we want to play," chief investment officer Srini Pularvarti told the WSJ.
Kevin Shult is a writer for Theflyonthewall.com (subscription required)
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