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In the last decade, Syracuse University has invested more than $272 million in Central America and the Caribbean.

The offshore investments, which SU is required to detail in its tax filings, are a common theme at universities with large endowment funds. But some tax experts warn that the investment strategy can be risky and often leaves high-level administrators and board members in the dark about how their university’s money is being spent.

In many cases, some experts said, the investments are also at odds with universities’ stated educational mission.

“What is worrisome in these offshore investments is a continued increase in a lack of transparency and a continued increase in risk taking,” said Thomas Gilbert, an associate professor of finance and business economics at the University of Washington. “That’s what should be of concern to people.”

On SU’s Form 990, which provides the public with information about nonprofit organizations, the university lists its yearly investments in geographic regions around the world. In its form for fiscal year 2009, the university didn’t invest a single dollar in Central America or the Caribbean. The next year, it invested more than $165 million there. By fiscal year 2017, the last year data is currently available for, its investments increased to $272 million in the region.

The investment strategy, also utilized by private corporations, puts money toward private equity and hedge funds located in offshore tax havens, such as the Cayman Islands. But tax rules for nonprofit organizations like colleges and universities mean it’s often near impossible to know where exactly the money is going and what kind of risks are involved, experts said.

Though some tax laws, such as Unrelated Business Income Tax, were enacted to protect nonprofits from for-profit businesses, they sometimes blur the details of a university’s investments, said Norman Silber, a law professor at Hofstra University.

“The original intention may not have been to obscure or hide the true nature of investments, but the effect of the existing structure is to make it very difficult for faculties at major universities, even sometimes for members of boards, to know precisely where the money is being invested,” Silber said.

At SU, an outsourced chief investment officer manages endowment investments. The university hired a new investment firm, Partners Capital, to manage the investments starting in January 2020. Before that, the Korea-based firm Pavilion provided the service.

But since investment firms tend to utilize strategies they don’t want competitors or the public to see, they provide little information to clients about the details of their investments, Gilbert said.

“The hedge fund manager is under no obligation whatsoever to tell you what they’re doing,” Gilbert said. “You as an investor cannot access your money easily and you as an investor also have very little transparency into what is going on.”

The Investment and Endowment Committee of SU’s Board of Trustees provides oversight of and receives regular reports from the university’s outsourced chief investment officer, said Jennifer Horvath, communications director for SU’s Business, Finance and Administrative Services Division, in a statement to The Daily Orange.

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The committee is responsible for selecting and terminating investment managers and uses an external agent to assist with manager selection and monitoring, the university’s fund administration guidelines show. It also provides guidelines in an investment policy statement, as well as through ongoing and ad hoc meetings and reviews, Horvath said.

As of June 30, 2020, the university’s endowment was $1.35 billion, with a distribution rate of 3.79% — a metric that describes how much the university spends from its endowment each year.

The university didn’t provide an answer to questions about whether the university or its board members know about the specific investments its partners are making.

“Frequently, the precise investments made by hedge funds are opaque,” Silber said. “It’s not an easy matter for trustees to learn that information.”

The use of blocker corporations, which can be used to shield tax-exempt organizations from taxes, can add to the confusion, Silber said.

Typically, when schools like SU invest in hedge funds, private equity or other businesses unrelated to their educational mission, they are required to pay a business tax. But by investing funds in offshore tax havens, universities avoid it.

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SU does pay business tax on its investments in private equity, hedge funds and other corporate entities, Horvath said. It also utilizes blocker corporations but only when the structure of an investment fund has certain characteristics that could cause “a significant level of compliance burden” on the administrative functions at the university, she said.

“Many endowments, foundations and other nonprofit entities, as well as for-profit corporations, utilize blocker corporations in the regular course of making investments,” Horvath said.

But using blocker corporations isn’t necessarily right just because it’s legal or because it amplifies profits, Silber said.

“I take issue with the simple-minded argument that says ‘who can blame the university for trying to maximize that,’” he said. “That isn’t correct if we look at this from the standpoint of the members of the board of trustees or the president of the university whose goal is to balance the financial objectives of the organization with the social, educational, pedagogical values the organization subscribes to.”

The idea that large endowments correlate with the quality of a college or university means schools often invest in financial assets that prop up their reputation rather than provide educational resources, Gilbert said.

“They are making these decisions to build this couffer rather than spending on productive assets of the university, which is the students and the research and the faculty, creating knowledge and disseminating knowledge,” Gilbert said. “The whole thing doesn’t seem to align with what should be the primary nature of universities.”

The public frequently forgets that risk taking and spending are not independent decisions for universities, he said. The two are linked, communicating a message about what an institution’s priorities are.

“When they invest in hedge funds or they buy equities, they are making a statement that the rate of return on that financial asset is bigger than the rate of return the university could earn if it invested internally, if it invested in students and research,” Gilbert said.

Published on February 14, 2021 at 11:36 pm

Contact Michael: msessa@syr.edu | @MichaelSessa3