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.