University Times

The value of Pitt's investment in a risky hedge fund has plunged from $5 million to $400,000 this year.

But even with that loss, the University has earned more than 18 percent on the investment since 1994, Vice Chancellor for Budget and Controller Arthur Ramicone told Senate Council Nov. 9.

In October, weeks after the near-collapse of the Long-Term Capital Management hedge fund, Pitt began withdrawing its remaining $400,000, Ramicone said. "But those funds lock up your money for a minimum of three years. You can only pull out one-third of your investment during each of those years," he said.

The University initially invested $5 million in the hedge fund in 1994, after the Pitt Board of Trustees investment committee voted to further diversify the University's endowment portfolio by investing in "alternative investments" such as hedge, buyout and venture capital funds, Ramicone said.

Long-Term Capital Management specializes in buying and re-selling bonds in order to profit from price discrepancies from one market to another.

"The fund was very successful in its early years, with 40 percent annual returns," Ramicone said. Pitt withdrew $8.4 million from the fund in 1996 and 1997, leaving the original $5 million, he reported.

The hedge fund began deteriorating in August with the economic failure of the Russian economy and its bond market, Ramicone said. Only a multi-billion dollar rescue by 14 investment banks and insurance companies saved Long-Term Capital Management from going belly-up, he said.

Pitt's $5 million balance in the hedge fund at the beginning of the year represented less than 1 percent of the University's $700 million invested endowment.

When Pitt first invested in the hedge fund, trustees were directing that the University should put 5 percent (about $15 million at that time) of its invested endowment into alternative investments, Ramicone said.

In 1997, trustees set a goal of doubling that allocation to 10 percent, which would be $70 million based on today's investment endowment. To date, Pitt has placed only a fraction of that $70 million in alternative investments, Ramicone said.

While the trustees' investment committee sets the percentages of endowment monies to be earmarked for specific types of investments, Pitt finance staff and outside consultants choose the actual investments, Ramicone explained.

— Bruce Steele