US counts costs of plummeting shares

July 18, 2003

US universities face still deeper budget cuts after endowment values dropped for a third straight year, compounding an existing crisis caused by a decline in government funding and private donations.

Despite a recent upswing in the stock market, the schools are still reeling from an earlier average 6 per cent fall in endowment values, the biggest drop since 1974.

In addition to relying on interest from their endowments to support operating costs, the universities normally skim an average of 5 per cent off the top of the funds and apply it to their annual budgets. That amount has been declining.

This trend coincides not only with a stark drop in government funding, but a big decline in donations from individuals and foundations, which have also been affected by the sluggish stock market.

Some universities are changing strategy, leaving conventional stocks behind in favour of hedge funds, which are generally pooled funds invested collectively. Hedge funds are generally considered safer than stocks, though the payoff can be more modest.

Universities with endowments worth more than $1 billion (£622 million) have doubled the proportion invested in hedge funds to nearly 20 per cent since 2001.

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