THE Ivy League institutions Harvard and Yale have been battered by the financial crisis, losing a combined $18bn in their endowments over the last year.

America's two richest universities, usually known for their investing prowess, warned of further budget cuts after seeing their endowments shrink by 30 per cent due to problems with their hedge fund and private equity portfolios.

Harvard's endowment dropped by $11bn to $26bn in the year to June, a fall of 30 per cent, according to the Harvard Management Company, which oversees the endowment. Excluding donations and distributions, the drop in investment performance amounted to 27.3 per cent, the first loss in seven years and the biggest percentage decline in four decades. This has prompted a review of how it manages its investments and allocates assets.

The losses forced the 373-year-old university to lay off 275 staff this summer — its first job cuts ever — and halt plans for a campus expansion across the Charles river in Cambridge, Massachusetts. The endowment covers a third of its annual budget.

Yale's endowment fell by $7bn to $16bn over the period, a worse-than-expected drop of 30 per cent. “We want to alert you to the fact that another round of reductions will be necessary,” Yale's president, Richard Levin, wrote in a letter to the Yale community.

“Only a small fraction of our endowment is invested in publicly traded securities, so the recent stock market rebound has not had a substantial effect,” he said. “The bulk of our endowment remains invested in illiquid assets, which have not begun to recover their value.”

This means that Yale would have an annual deficit of $150m from 2011 to 2014, he wrote. He said the school would cut non-salary expenses by another five per cent this year, having already reduced staff and non-salary expenses by 7.5 per cent.

Yale, based in New Haven, Connecticut, has cut 600 jobs and postponed construction plans worth $2bn.

An initiative to improve administrative services will be scaled back and the university will cut spending on its West Campus development by more than 25 per cent. “No area of expenditure will be immune from close scrutiny,” Levin said. He added that Yale would also slow the pace of faculty recruitment.

In recent years, both Harvard and Yale invested heavily in alternative investments such as hedge funds, private equity and property, which brought in big returns until the financial crisis and recession kicked in. Last year many of their bets did not pay off and both lost far more than other universities, which focused on stocks and bonds, and where endowments shrank by 18 per cent on average, according to the research firm Wilshire Associates.

Jane Mendillo, head of Harvard Management Company (HMC), said its portfolio was affected by “extreme volatility and financial dysfunction”. She blamed Harvard's reliance on illiquid asset classes for the losses. For years, Harvard kept hardly any cash on hand but now plans to keep as much as $500m.

Mendillo said in her report that “nearly every asset class did poorly” and she called the past year “very likely the most challenging period in modern times for the financial markets as well as for the Harvard portfolio”. She added “We expect to see a prolonged period of instability and slower growth in some markets.”

— Th Guardian, London