James writes:

Earlier this summer I contributed an article to a special issue of City Journal on "New York's Tomorrow." My article, The Culture Crash, was an analysis of how arts organizations are doing in the economic downturn. The quick answer is not well. I then question why arts endowments lost so much money (often between 25 and 33 percent of value). I argue that a risky, heavily managed, and fee-driven strategy of investment, sometimes called the "Yale Model," led to bad habits in many organizations.

The article has received a great deal of attention. Investment managers have contacted me to say that the Yale Model still cannot be beat in a comparison of investment strategies over time. One friend sent me a copy of David Swensen's book Pioneering Portfolio Management, which is much appreciated. The reason arts endowments have fallen to such an extent, they point out, is because art funds went up so much in previous years.

All true, but that's only part of the story. The other side is the human factor--part of a disconnect I see between arts administrators and their investment managers. The Yale Model produced lavish results in good times, maybe too good, and this encouraged organizations to expand and overspend beyond their means. If the fluctuations of the Yale Model really average out on the plus side, why do so many arts organizations now face such financial hardship? The answer is that they loved the rewards, but arts organizations prepared far too little for the risks of the Yale Model.

On the investor side, the supposed irrefutability of the Yale Model also became a cover for bad behavior. Managers could rationalize higher fee structures. Half-billion-dollar losses could be excused as part of the plan. The Yale Model may still be the best strategy for long-term investment, but when applied to non-profit organizations it has become a snake-oil tonic, overly hyped and more than a little addictive.

So maybe it should come as little surprise that, according to The Wall Street Journal, Harvard University has announced a change in its investment strategy. As with many non-profit endowments, when the market tanked, Harvard's alternative investments and illiquid assets could not be sold, and the endowment took a nosedive. Now Harvard says it will move away from some of the more perilous alternative investments at the heart of the Yale Model that have wreaked such havoc over the past year.

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