Harvard is an easy target for the woes of our economy. Its business school produced George W. Bush, the fellow who's presided over the current economic catastrophe, and Rick Wagoner, the CEO of the largest automobile maker who's led its stock down 95% in the last eight years and now wants $25 billion worth of taxpayer money to keep the millions rolling into his bank account. But Harvard had these folks for just two years, so it's tough to blame the school for the current predicament.

However, with $36.9 billion in assets (as of June 30), Harvard also has the largest endowment of any university. And thanks to its big exposure to very illiquid interests in venture capital (VC) and private equity (PE) firms, Harvard leads a growing list of limited partners (LPs) which are selling stocks and those very illiquid interests in order to come up with the cash needed to fulfill their capital calls to these partnerships.

This requires some explaining. VC firms raise money from limited partners such as wealthy individuals, foundations, pension funds, and endowments. But the LPs don't write checks up front -- instead they hold onto their cash and must write a check when the VC calls and asks for the money when the VC is on the verge of making an investment. The problem for many LPs like Harvard is that much of their stock portfolio is locked up in hedge funds and these illiquid VC and PE interests.

The Dow lost 385 points this week with a 315 point election day rally on Tuesday, two consecutive days which totaled 929 points down, and a Friday rally of 248 points. Did the market rise on hopes of a McCain upset only to fall due to disappointment that Obama won? Did the market rally Friday because the 6.5% unemployment rate was not as bad as expected? It could be, but I doubt it.

More likely, the markets are moving because of the trading behavior of endowments, pension funds, and hedge funds. They make decisions for very different reasons. But some reporting on daily market movements looks like a joke -- nobody knows why the market goes up or down, but commenters use price movements as a daily barometer of the national mood. So how do endowments, pension funds, and hedge funds move the markets? Here's how:

• Endowments. Big university endowments, such as Harvard's, are desperately trying to unload billions of dollars worth of illiquid interests in venture capital and private equity firms. Harvard is reportedly trying to dump $1.5 billion worth of such interests into a market where there is likely to be very little interest. Not only that, these private equity firms are demanding that endowments fork over the money they committed to them so they can make new investments. And with the S&P 500 down 36.6% so far this year, many endowments are selling anything liquid to meet these commitments and to pay shorter-term obligations -- such as paying professors and keeping the lights on.

Your 401(k) and ROTH IRA might be down, and shares of student lender Sallie Mae (NYSE: SLM) have gone from $50 to $15 since October, over concerns about the student loan market.

But you'll be happy to know that the endowment for Harvard is chugging right along, up in the 7-9% range for its fiscal year ended in June, according to The Wall Street Journal (subscription required).

In the current market malaise, that's enough to make it the best-performing major endowment, according to experts. That's especially impressive given the fund's massive size: $35 billion.

The Journal reports that "The endowment's staff pursued a strategy of shielding the fund from market downturns by purchasing credit-default swaps that helped protect it from wild market swings. Harvard also had a larger position than many endowments in plain-vanilla Treasury debt, which outperformed the stock market."

I have just one question: With a $35 billion endowment growing at 7% per year, why do they need to charge $45 thousand per yeah? To its credit, the school announced late last year that it would extend much more generous financial aid to middle-class families.

Harvard has come out with a study that says the housing crisis will be prolonged. According to Reuters, the research says, "Record foreclosures and limited access to credit will make it harder than usual to rebound from this U.S. housing market slump."

It is comforting when some of the smartest people in the world come to the same conclusion that everyone else has already reached.

The Harvard work is based on the premise that a combination of high foreclosures and tight credit will keep housing down longer than in the past. That may be true.

The people at Harvard can afford houses. No one else can.

Douglas A. McIntyre is an editor at 247wallst.com.

Despite Fed Chair Ben Bernanke's comments this week about inflation, the dollar is dropping -- which is fueling higher oil prices. And the reason for that relates to the different strategies of the Fed and European central banks for fighting inflation.

The difference? The Fed talks about inflation but keeps its interest rate at 2%. If Bernanke was serious about fighting inflation, he'd raise rates. Meanwhile, the New York Times reports that two European central banks -- which set their rates at 4% (European Central Bank (ECB)) and 5% (Bank of England) -- are talking about raising the rates further because they're "alarmed by soaring prices for food and fuel." The ECB thinks May inflation was 3.6% and it expects a 3.4% price rise for all of 2008.

The dollar has lost 70% of its value since January 2001 -- it's dropped from 92 cents to the Euro down to $1.56. Now if you're an investor, would you rather get a 4% return or a 2% one? That's the simple choice faced by people trying to decide whether to buy Euros or Dollars. And with the ECB on track to raise interest rates next month, the dollar is likely to fall further behind unless Bernanke puts the Fed Funds rate where his mouth is.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

In fascinating endowment news yesterday, Harvard University turned to one of its former investment stars to take the helm of the Ivy League's biggest endowment of $35 billion.

Currently chief investment officer at Wellesley College, Jane Mendillo has been tapped o become the president and chief executive of Harvard Management Company. She fills in the slot vacated by Mohamed El-Erian, the emerging market bond guru, who left last year after less than two years in the job to return to his previous post with Bill Gross' PIMCO.

Famed uber-investor Jack Meyer racked up impressive returns in his tenure at Harvard Management Company during the 1990s. According to Wikipedia, Meyer grew an endowment "worth $4.8 billion to a value of $25.9 billion (including new contributions). During the last decade of his tenure, the endowment earned an annualized return of 15.9%."

Not too shabby.

It's great to see a woman take over the helm of such a high-profile investment fund. The best part of this whole move is that Mendillo is a Yale grad!

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

Sometimes you need to look outside the box in constructing a portfolio, and sometimes you have to look at the box. That box may play an important role in the diversification of your portfolio.

The New York Times has an article today about the prevalence of timber threat in the U.S. The article quotes, "The total value of the American log-export market has more than doubled since 2000, industry experts said, and it continues to grow."

This growth, in turn, is encouraging a new breed of tree hugger -- thieves who chop down timber illegally. It's not as severe as tree cribbing in countries like Indonesia and Brazil facing huge deforestation.

Historically, large investment funds like the Harvard Endowment have made large investments into timber (legally). In 2004, Harvard purchased a 468,000-acre New Zealand forest -- then estimated to be worth $540 million.

No doubt, Facebook is one of the internet's hottest startups. The company has raised gobs of venture capital, has deals with companies like Microsoft (NASDAQ: MSFT), and is often rumored to go public or be bought out.

The company's founder, Mark Zuckerberg, is just in his early twenties, fresh from Harvard. Over the past few months, several of his recent classmates have made claims that they are the real owners of the Facebook concept.

Such disputes are very common for early stage companies. And it's also common for these companies to be sloppy in protecting themselves from legal claims.

So what can be done?

From June 30, 2006 to June 30, 2007, Harvard's endowment returned 23%. With the market up less than 20% and the median institutional fund up 17.7%, these returns would be impressive for any hedge fund. But Harvard's endowment isn't a hedge fund. It's a diversified pool of investments totaling nearly $35 billion. This type of outperformance on $35 billion is unbelievable.

Huge outperformance at Harvard's endowment has allowed its size to surge above Yale's endowment, which amounts to just $18 billion. Harvard has become increasingly reliant on its endowment to cover costs related to running the school, according to the AP.

Interestingly, Yale's endowment manager David Swenson recently wrote a book, Unconventional Success: A Fundamental Approach to Personal Investment, in which he essentially advocated a diversified portfolio of index funds for the average investor.

In the wake of the nation's subprime worries, Wall Street has over the past year tried to offload its risky mortgage-backed securities to just about anyone who showed an interest, including university endowments. Last month, it was reported that the top 53 university endowments, with assets of about $217Bi, have invested nearly 18% of their money into hedge funds. In contrast, the average pension fund has around 5% in hedge funds.

Today The Wall Street Journal reported that Harvard University's endowment fund has lost about $350M through its investment through Sowood Capital Management, a hedge fund founded by Jeffrey Larson and Stuart Porter. Larson managed Harvard's foreign stock holdings until 2004, and then left to start Sowood, which recently lost over half its $3B value through poor bond investments.

Harvard Management Co, manager of the university's endowment, has always been considered one of the nation's most successful investment management firms, with annualized returns of 15.2% over the past 10 years through 2006.

Their hedge fund strategy worked well in the past, especially during the period 2000-2002, when they generally outperformed other investments. Endowments, however, are late to the table. While $350M is only a dent in Harvard's $29B endowment, it highlights the risks that colleges are taking in nontraditional investments like hedge funds and private equity. If Harvard is making these mistakes, other universities need to seriously look at what they are doing.

As sports columnist Blackie Sherrod once wrote "If you bet on a horse, that's gambling. If you bet you can make three spades, that's entertainment. If you bet cotton will go up three points, that's business. See the difference?"

Apparently the law sees a principled distinction between these three forms of betting, and poker enthusiasts and Harvard professors are doing research to try to prove that poker is a game of skill, in the hope that such a determination could lead to the legalization of online poker betting. According to the Wall Street Journal, our government categorizes games that are considered to be dominated by chance are gambling, while those that are mainly skill are not. Congressman Barney Frank has introduced a bill that would legalize online gambling, saying that gambling is a personal freedom issue.

But here's what I don't understand: How can you possibly argue that day-trading Pink Sheets stocks is a game of skill, but poker is a game of chance? Does anyone honestly think that?

You could possibly argue that day-trading is legal because it serves an economic purpose -- the liquidity that trading provides encourages investment. Without the ability to sell shares, people would be less likely to invest in American businesses.

But online poker can serve an economic function as well: By legitimizing the games, the government could collect tax revenue. And with record deficits and a soaring national debt, doesn't the government have better things to do than battle the imaginary dragon of online poker? Maybe they could start by getting rid of the The Lottery.

Harvard, Stanford, Notre Dame, and MIT have all received permission from the IRS to allow donors to invest in their endowments (WSJ, registration required). By structuring investments as charitable trusts, donors receive a regular distribution until death, and then the money goes to the school.

The returns earned by endowments at schools such as Harvard and Yale are impressive. The Harvard endowment has returned 15.2% per year for the past 10 years, crushing the S&P 500's return of 8.3%. In addition to their strong performance, endowments are diversified across so many different asset classes that they often bear a very low correlation to the stock market. While investing in endowments is often inefficient in terms of taxes, the historically higher returns some have earned has more than made up for it.

If tax rules loosen up and allow endowment investors to keep a greater share of their gains, we could see endowments become a popular vehicle for retirement planning. Instead of watching the Final Four basketball games, investors could keep a close eye on which school is earning the highest returns.

I wonder how much correlation there would be between the prestige of a school and the performance of its endowment. As Warren Buffett has said, "Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."

Volatility Index S&P 500 Options-VIX up 0.24 to 13.53

Advanced Micro Devices Inc. (NYSE:AMD) calls (quoted in Pennies) busy on chatter of private equity cash infusion. AMD is recently up $0.46 to $13.87. AMD has been frequently subject to LBO chatter; today chatter is circulating that a friendly private equity-strategic partner could surface to make cash infusion. Speculation is that AMD could announce a deal similar to the deal Sun Microsystems Inc. (NASDAQ:SUNW) announced on 1/23/07, when it received a $700 million dollar private placement from KKR. AMD call option volume of 73,560 contracts compares to put volume of 9,747 contracts. AMD April option implied volatility of 41 is below its 26-week average of 45 according to Track Data, suggesting decreasing price risks.

eBay Inc. (NASDAQ:EBAY) implied volatility is low. Meg Whitman enters ninth-year working as eBay CEO. EBAY is recently up $0.23 to $31.72. Meg Whitman has an estimated net worth of $1.2 billion according to Forbes, much of it in EBAY stock. Years ago, Whitman said she would leave EBAY after eight to ten years. Whitman joined EBAY in 1998. EBAY has a market cap of $43 billion. Microsoft Corp. (NASDAQ:MSFT) has a market cap of $270 billion. EBAY overall option implied volatility of 34 is below its 26-week average of 37 according to Track Data, indicating decreasing risks.

Option volume leaders today are: SanDisk Corp. (NASDAQ:SNDK), AtheroGenics Inc. (NASDAQ:AGIX), Halliburton Co. (NYSE:HAL) and Qualcomm Inc. (NASDAQ:QCOM).

Note: The Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.

Kiplinger's Personal Finance magazine just published its ranking of the "best values" in private colleges. The rankings featured two lists: one for the top liberal arts colleges, which offer mostly undergraduate programs, and the other for universities, which also offer graduate degrees.

As a sophomore of Amherst College, I was not surprised to see Swarthmore, Williams, and Amherst round out the top three colleges. Cal Tech, Yale, and Harvard topped the list for the top three universities.

Like many private institutions across the nation, Swarthmore uses its own calculation, in addition to the federal government's formula, to determine who qualifies for need-based aid. "We really want to know your situation and give a fair assessment," says James Bock, the financial aid director at Swarthmore college. The result can be surprising. "People can qualify for aid with incomes of $140,000 and above."

Not only does Swarthmore and these highly competitive liberal arts colleges offer a great education and financial aid packages, but they seem also to come with a degree of social conscience, e.g., the capacity to "change the world energy." Scott Storm, chose Swarthmore because he "wanted a place that was going to be very aware of social and civic responsibilities. One example that was noted was that Swarthmore sent "Swatties" to New Orleans to gut houses and to China to work in Aids clinics.

In the past, I've written about how hiring a pro to manage your money is unlikely to lead to superior returns, even if he or she has stellar Ivy League credentials. Nevertheless, investors may be able to learn some things from the new manager of Harvard University's $30 billion endowment. The New York Times recently interviewed Mohamed El-Erian, who took over the post last year. Here are some of the ideas that I culled from reading about his strategies:

* Be aggressive and willing to go against popular sentiment. In mid-January, only months after taking over, El-Erian made a large bet that the global financial markets were over-valued. It's a decision that's paid off so far, but it took some courage: he was the new man on the job, and he wasn't afraid to stick his neck out and make a bold call.

* While his predecessor, Jack Meyer, was unwilling to make bets on the direction of the market, El-Erian believes that he can do so with success. While this view in contradicted by many market pundits, El-Erian has confidence in his abilities, and is giving it a shot and, so far succeeding.

* El-Erian described his father's, a law professor, insistence that "we be exposed every day to a range of international newspapers that covered the entire political spectrum because it was a constant reminder that there are many ways to think about the same issue." Looking at issues from different perspectives, and seeing things differently from others, is an important part of successful investing. In fact, it's the only way to find strong stocks.

Michael Steinhardt, one of the most successful investors in recent times, called this variant perception: "a well-founded view that is meaningfully different from the market consensus . . . In those instances where there was no variant perception . . . I generally had no interest and would discourage investing."

The main thing to remember is this: to have an edge in investing, you need to see or understand something that others don't.