Harvard - America's oldest university and the world's wealthiest - helped pioneer a model of diversified endowment investing that many colleges have copied, branching into exotic investments like timber and private equity. When most schools were sticking with stocks and bonds, Harvard was buying forests in Maine and slices of startup companies financed with venture capital.
Now, the question is whether those practices have cushioned - or worsened - the blow from the latest downturn.
Harvard's endowment was worth a staggering $37 billion as of last year - a sum so big that members of Congress accused the Ivy League school and others of hoarding their riches and pressured them to share more with its students.
The university has refused to say exactly how much it lost in the meltdown. But Moody's Investors Service has projected losses of 30 percent for college and university endowments overall this year. If that were applied to Harvard, it would mean a drop of $11 billion.
Harvard President Drew Gilpin Faust, in an e-mail Monday to faculty, staff and students, warned only of "unprecedented endowment losses" and said the school is looking at ways to cut spending.
"We have to think not just about what more we might wish to do, but what we might do at a different pace or do without," she said.
Among other things, she said Harvard will review compensation costs and the school's ambitious plans to expand across the Charles River. But she said the university intends to push ahead with an expansion of financial aid that will ensure that families with incomes below $60,000 will pay nothing to send their children to Harvard.
Other elite schools are also warning of tight times ahead.
Fellow Ivy Leaguers Brown and Cornell have frozen some hiring and are either delaying construction or reviewing budgets to see which projects can be put off. Amherst and Williams are scaling back construction projects to brace for a slowdown in giving and more requests for financial aid. Stanford is slashing its budget by $45 million.
Harvard Management Co., which oversees the endowment, is legendary in investment circles, with an investment strategy that has produced big returns for the university. Over the past 10 years, Harvard investments earned a remarkable 13.8 percent annually, or two to three times better than the stock market overall.
"It's really outperformed almost every other university out there over the long run," said Verne Sedlacek, former chief financial officer of the HMC and current president and chief executive of CommonFund, a nonprofit that advises universities on investments. "They get access to very good managers because they're Harvard."
But equally important has been HMC's knack for eking out decent returns in years when everyone else has big losses, like in 2002, when endowments fell 6 percent on average and Harvard lost just 2.7 percent. The university has cited HMC's record of hedging against losses in down markets to justify bonuses of as much as $35 million for its money managers - payouts that have angered some alumni.
Diversification has protected Harvard from past market declines because there were always certain asset classes, such as oil, timber and gas, that thrived even when stocks and bonds crashed, said David Scudder, chairman of Aureus Asset Management in Boston, who was a vice president at HMC from 1999 through 2005.
But now, losses are piling up across virtually all asset classes.
"The principle of diversification is still working to cushion a part of the decline, but not to the same degree that it did five or six or seven years ago," Scudder said.
Harvard's latest report, in September, showed an 8.6 percent return for the year ending June 30, compared with a negative 13.1-percent return for the S&P 500 Index. But Harvard won't say how it has performed in the period since June 30, during which the S&P is down an additional 28 percent.
What is public from the last report is Harvard's asset allocation targets: 11 percent each in domestic, foreign and emerging market equities; 26 percent in real assets like timber and real estate; and 11 percent each in bonds and private equity.
Those figures do little to show just how hard Harvard will ultimately be hit. Some investments, like bonds, have been battered by the mortgage crisis, but others have not; some are even hedged against a downturn in real estate and may have gone way up.
Sedlacek said the scale of any losses - particularly from unconventional investments - is impossible to predict, but he expects Harvard will still perform better than most universities.
Similarly, Scudder said he wasn't aware of any risky investments he thought Harvard would come to regret. Nor did he think recent events undermined Harvard's long-term strategy of diversification.
Other colleges have been more specific on their recent losses; Amherst, for instance, has said its endowment is down 25 percent.
Seventy-six institutions last year reported endowments of $1 billion or more, but that number will certainly fall.
For the wealthiest institutions, their strength is also a vulnerability: While most schools rely almost entirely on tuition or state funds, Harvard gets one-third of its budget from endowment earnings.
Faust noted that the endowment isn't the only financial issue facing Harvard. She noted that "donors and foundations will be harder pressed to support our activities," while federal grants could also dry up.
By Associated Press Writers Eric Tucker and Justin Pope