Criticism of HMC by HDAG and The Crimson is Misinformed

To the editors:

Re: “Drop The Stock,” editorial, Jan. 12.

This newspaper’s recent criticism of Harvard Management Company’s (HMC) indirect holdings in companies doing business with the Sudanese government is misinformed and is energy wasted by the Harvard Darfur Action Group (HDAG) and The Crimson. Not only do the groups’ allegations fail to understand the possible investment choices given the HMC, but they do not even account for the actual holdings in Harvard’s endowment. The allegations only serve to demonstrate a lack of understanding of financial instruments, unnecessarily tarnish the University’s name, and keep the HMC from doing its job.

First, when the HMC reports its holdings, it only reports long stock positions. It is not required to report its short positions, meaning securities borrowed and sold. If short positions are taken into account, the HMC is potentially shorting shares of some of the companies in question (PetroChina, Sinopec, Petronas). In effect, this means that Harvard could own a negative number of shares in these companies. The Crimson also only reported indirect holdings through Exhange Treaded Funds (ETFs), such as the FXI index. However, the HMC also owns (and sells short) securities such as bonds, credit default swaps, and other derivative instruments, the trading of which directly impacts (for better or worse) the welfare of the companies in question.

Second, these shares held by the Harvard Management Company are held only through Exchange Traded Funds (ETFs) and other broad market indices. Almost any ETF has a component stock that, when traded, has a direct impact on PetroChina’s or Sinopec’s stock price. If I were to buy a representative ETF of the world economy today, I would be holding a stake in PetroChina and Sinopec. I would also be invested in Warren Buffett’s Berkshire Hathaway, which holds a significant stake in PetroChina. I would own shares in McDonald’s, Exxon, and BASF, all of which have major business partnerships with Sinopec. Does this mean I am promoting genocide if I invest in these companies or in ETFs with these companies as components? Holding stock in these affiliate companies is arguably promoting the Sudanese government as much as is holding a stock index containing PetroChina as a component.

This raises a multitude of questions, depending upon how far down the financial rabbit hole one wants to go. If HDAG had its way, should the HMC have to short shares of PetroChina, which would do the Sudanese government more harm than just divesting, and if so, how much should it short? Should the HMC strive to make returns negatively correlated with the share price of Sinopec? What about the HMC’s bond holdings, or investments in China altogether, where the share price correlation of stocks in the FXI is over 90 percent, including Sinopec? The methodology of measuring HMC’s “genocide” holdings only as indirect ownership of shares in these companies can in no accurate way measure the effect of the HMC on genocide in Darfur. It does not take into account possible short positions (of which the HMC has many), bond holdings, or the thousands of other securities whose prices are directly linked to the performance of these companies.

Regulating the HMC’s investments beyond the individual stock level would be an undue burden on the HMC, and could easily lead to consequences opposite those intended. From the tip of the accounting iceberg, HDAG’s and The Crimson’s measure of promoting genocide by the HMC can swiftly reach the wrong conclusion when shorts are taken into account. The HMC is doing the right thing­—managing Harvard’s endowment to the best of its abilities while maintaining utmost standards of investing ethics.



BEJANMIN J. CONLEE ’07

Cambridge, Mass.

March 14, 2007



The writer is a member of Acumen Investing Club at Harvard College.