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From its inception in 1929, New York's Museum of Modern Art has sought to be on the cutting edge.

From its inception in 1929, New York's Museum of Modern Art has sought to be on the cutting edge. In 1936 it introduced Americans to modern European artists for the first time through two groundbreaking, and eye-opening, exhibitions, "Cubism and Abstract Art" and "Fantastic Art, Dada and Surrealism." In 1961 MoMA mounted a sprawling exhibit, "The Art of Assemblage," that showcased seminal works by Joseph Cornell, Marcel Duchamp, Marisol, Louise Nevelson, Lucas Samaras and Richard Stankiewicz. In 1970 the museum's historic "Information" exhibit featured the work of radical visionaries like Vito Acconci and Hans Haacke.

When it comes to investing, MoMA is no less avant-garde. Since the mid-1990s the museum's board of trustees has staked an unusually aggressive bet on hedge funds. Today nearly one quarter of its $400 million endowment is parked in such investments. That compares with an average 7.4 percent allocation to alternative investments for similarly sized endowments.

So far, at least, MoMA's bold brush strokes have created an impressive financial canvas, under the direction of the board's high-priced 15-member investment committee -- which includes such prominent financiers as its chairman, Leon Black, head of private equity firm Apollo Advisors, and Richard Sal-omon, former investment adviser to the Rockefeller family. For the three years ended December 31, 2001, the museum's endowment has racked up an average annual return of 12.3 percent. That compares with a 4.3 percent median return among 64 foundations and endowments surveyed by Mercer Investment Consulting. For the 12-month period ended June 30, 2001, MoMA's fiscal year, the fund returned 6.2 percent. Its closest rival for money and social status in New York, the Metropolitan Museum of Art, which has 16 percent of its money in hedge funds, earned a 1.8 percent return on its $1.5 billion endowment. The average college endowment with between $100 million and $500 million in assets delivered a 3.4 percent loss.

Although MoMA was only able to provide partial results for the fiscal year ended June 30, the museum's endowment appears to have weathered the more recent market volatility remarkably well: Its portfolio of "marketable" securities -- mainly hedge funds, publicly traded domestic and international stocks and bonds -- delivered a return of about 1 percent for the 12-month period, versus a 13.2 percent decline by the Standard & Poor's 500 index over the same span.

THE ENDOWMENT'S SUCCESS REFLECTS THE financial savvy and personal connections of the investment committee, which also includes nontrustees such as Abby Joseph Cohen, the Goldman, Sachs & Co. strategist, and Leon Cooperman, chairman and CEO of hedge fund Omega Advisors, as well as trustee Robert Menschel, a former Goldman Sachs partner. Thanks to these luminaries, MoMA has been able to invest in elite hedge funds like Highfields Capital Management (up 21 percent net of fees last year) and Lone Pine Capital (up 51 percent net of fees) that ordinary Joes can't get near. The museum's other hedge funds include Davidson Kempner Partners, Farallon Capital Management and Och-Ziff Capital Management Group. Most were reported to be up through June. For the three years ended December 31, 2001, the endowment's hedge fund allocation returned an average annual 18.8 percent. Over the same period the S&P 500 returned just 1 percent.

James Gara, MoMA's chief operating officer, credits the board's basic prudence for those results. "There's always a kind of tension," he says. "We want to be cutting edge, but we also want to be a stable institution."

Still, MoMA's investment approach is a potentially risky one: When a hedge fund blows up, the fallout can be as ugly as it is unexpected. The Art Institute of Chicago learned that lesson last year when its own hyperaggressive bet on hedge funds, which at one point claimed more than 50 percent of its $650 million endowment, foundered with an estimated $20 million loss in one fund.

"It's hard to argue too much with MoMA's recent success," says Philip Dybvig, a professor of banking and finance at the John M. Olin School of Business at Washington University in Saint Louis. "But you never know whether performance is due to luck or to skill. One concern is that most hedge funds are not very transparent, and therefore it's hard to assess their downside risk."

Why the push into hedge funds? Like most cultural institutions, MoMA can always use a little extra money to buy artwork and pay its curators. Moreover, the museum needs strong endowment returns to help finance the costly renovation and expansion of its midtown Manhattan headquarters. In May MoMA closed its 53rd Street building and moved to a temporary facility in the borough of Queens. There it displays a small portion of its collection, which includes more than 100,000 paintings, sculptures, drawings, prints and photographs. (Among the gems: Pablo Picasso's Demoiselles d'Avignon and Vincent Van Gogh's Starry Night.)

To finance the expansion, which will increase the museum's gallery space by 60 percent when it is completed in 2005, MoMA kicked off a $650 million fund-raising drive four years ago, with $100 million earmarked for the endowment. The museum has raised more than $500 million and increased the campaign goal to $800 million.

MoMA also pulled in an additional $250 million from a bond offering last fall, which earned an AA­ rating from S&P and an A1 rating from Moody's Investors Service. In their reports both agencies pointed to strong financial management by the museum's president, Agnes Gund, who retired on July 1 and was succeeded by Menschel; its director, Glenn Lowry; and its chief operating officer, Gara.

Among museums, MoMA is doing well financially. In fiscal 2001 it posted a $1.6 million operating surplus on revenues of $85 million. The operating budget for the new fiscal year is $83 million. That's especially impressive in light of the fact that most museums run deficits. The Metropolitan Museum, for example, reported a $7 million deficit for its fiscal year ended June 30, 2002.

Unlike other New York City cultural institutions, MoMA has escaped much of the sting of the post­September 11 drop in tourism. That's largely because it had already budgeted and planned for a steep decline in museum attendance during the years that the collection will be temporarily housed in Queens.

In good times and bad, a seat on the MoMA board carries with it a social status that few New York cultural institutions can match. In the art world only a place on the board of the Met might be deemed more desirable, though insiders say that a MoMA trusteeship is regarded as a little more hip. Under the leadership of chairman Ronald Lauder, MoMA's board includes investor Sid Bass, architect Philip Johnson, former PaineWebber chairman and CEO Donald Marron and AOL Time Warner CEO Richard Parsons.

The trustees delegate financial responsibility for the endowment to the investment committee, one of several advisory groups to the board. That committee oversees Gara, who in turn supervises Carla Hunter, the director of investments and treasury. Gara and Hunter may recommend changes in asset allocation strategy or new money manager hires, but the committee ultimately determines investment policy and asset allocation and approves all manager hires. It has the final word on how the endowment is run.

Whether they are attracted to the board for its social status or simply love modern art and want to help secure the museum's future, the members of the investment committee possess a depth of financial expertise that few endowments can match. "The horsepower we have on this endowment is enormous. I mean, it's like aiming a cannon at a gnat," says Hunter, an investment novice when Gara hired her five years ago to oversee what was then a $250 million endowment.

Gara estimates that at least half the 30 or so portfolio managers and partnerships on MoMA's roster were originally recommended by members of the investment committee. (The others came from consultant recommendations and research by Hunter and Gara.) Last year, for example, at the suggestion of chairman Black, the endowment hired a distressed securities fund managed by Trust Company of the West's U.S. junk bond chief, Mark Attanasio. Black and Attanasio had worked together with high-yield honcho Michael Milken at Drexel Burnham Lambert in the 1980s.

"It's not very often that there's a well-regarded venture fund or private equity fund or hedge fund that one person or another can't find out about," says Salomon, a vice chairman of the board of trustees and former co-chairman of the investment committee. "You can't find a private equity fund out there that Leon Black doesn't know."

For the past decade or so, Black and his colleagues have stuck with their basic asset allocation strategy, with only some minor tweaking. As of April 1 the endowment had 31 percent of its assets in domestic equity, 10 percent in international equity, 23 percent in hedge funds and 7 percent in private equity and venture capital (making its total commitment to alternative assets 30 percent), 22 percent in fixed income and cash, and 7 percent in real estate and other miscellaneous investment classes.

Of course a collection of grandees doesn't always guarantee results. The elite Art Institute of Chicago lost millions last year in an investment in a fledgling hedge fund, Integral Investment Management. In December the museum sued Integral, which countersued the next month. Both suits are still pending. This winter the Art Institute fired Atlanta-based consultant Kennedy Capital Advisors, which had advised the board on investment strategy, and slashed its commitments to alternative investments by nearly half.

MOMA'S ENDOWMENT DATES BACK TO 1931, two years after the museum was founded by art patron Lillie Bliss, Abby Aldrich Rockefeller, wife of oil heir John D. Rockefeller Jr., and Mary Quinn Sullivan, a collector. Abby Rockefeller -- whose family lost more than half of its fortune in the stock market crash of 1929 -- served as the museum's first treasurer. When Bliss died in 1931, she bequeathed her art collection to the museum with one stipulation: that the museum raise a $1 million endowment to ensure its safekeeping. Over the next three years, the trustees raised $650,000, no small accomplishment during the depths of the Great Depression. In 1934 executors of the Bliss estate accepted that amount as sufficient and handed over the gift. That same year the museum formed an investment committee, chaired by Nelson Rockefeller, to oversee management of the assets.

From the outset the endowment provided a crucial source of income for the museum. MoMA has worked hard to diversify its revenue streams: Sound investment management of the endowment is key to its fiscal strength. According to a Moody's report, revenue streams include gross merchandise sales, which provided 36.9 percent of revenues in fiscal 2001, and investment income, which accounted for 22.5 percent. Fundraising generated 8.5 percent, admissions 7.2 percent and memberships 6.0 percent. (Other sources of income accounted for the remaining revenues.)

"We look at the endowment as a kind of rock for this institution, and its preservation is critical," says Gara. "We can count on the endowment. Other operating revenues can fluctuate."

A roaring bull market enabled the museum to grow its endowment from $100 million in 1989 to roughly $250 million in 1997. During that time MoMA did not employ a full-time staffer who focused exclusively on the endowment portfolio. Instead, it relied on its consultant, Cambridge Associates, and its investment committee. Gara, a MoMA veteran with an MBA from the University of Pennsylvania's Wharton School, had day-to-day oversight of the endowment, but he also bore several other responsibilities at the museum, such as oversight of MoMA's retail operations. "We felt that we needed someone on staff to really look at our portfolio and make sure that our asset mix met the needs of this institution," he says. In 1997 Gara named Hunter to the new post of director of investments and treasury.

Hunter was a curious choice. A South Carolina native, she earned a bachelor of music degree from Indiana University in 1976 and an accounting degree from Arizona State University in 1978. Hunter had spent much of her professional life in the nonprofit sector, serving as director of the City Center of Music and Drama, which provides management and administrative services to the New York City Ballet, New York City Opera and New York State Theater. In 1994 she joined Davidson, Weil Associates, a New York­based hedge fund manager, as chief financial officer. She says she focused primarily on administration and compliance at the fund and did not play any role in investment strategy. In 1997 Davidson, Weil closed, and Hunter went looking for a job.

"I took a gamble on Carla because she has the right personality, the right ability to learn and the right energy level," says Gara. "My view -- and the trustees were supportive -- was to bring somebody in who we could mold and develop, someone who had the kind of intellectual interest that we could move forward."

Hunter has grown into her role. "Carla has made very rapid progress up what was a very steep learning curve," says trustee Salomon. "She's a very good analyst and an independent thinker. She will hear what the people on the investment committee say, and she won't necessarily agree. Her disagreement is subtle but persistent."

At one investment committee meeting, Salomon recalls, several members were pushing for the appointment of one potential money manager, which he would not identify. "Some investment committee members said they had the highest possible regard for them," Salomon says. "Carla wanted to make sure she knew exactly what was happening in that portfolio. They said, 'Don't worry about them.' She wasn't willing to accept that, and more power to her."

Hunter and Gara seem to complement each other well. Where Hunter shoots from the hip, Gara is characteristically slow and deliberate. "I'm not a very good diplomat," Hunter says. "That's where James comes in."

Gara encourages Hunter to think about how the museum could better use the resources and relationships provided by its investment committee. "In bringing Carla on board we wanted to really focus and develop those kinds of relationships," he says.

MoMA's tradition of deploying -- and exploiting -- its trustees' contacts dates back at least to 1974. That year trustee Menschel, then a Goldman Sachs partner, tapped value money manager First Manhattan Co. to handle a piece of the endowment's assets. "Bob Menschel knew of [David] Sandy Gottesman and Arthur Zankel at First Manhattan, and he thought the museum would benefit by investing with them," says Sal-omon. First Manhattan remains a MoMA manager.

Most trustees and investment committee members make their way to MoMA through just such old-school networking. In addition to Goldman's Cohen and Omega's Cooperman, nontrustees on the committee include Carol Einiger, chief investment officer of Rockefeller University's $1.3 billion endowment; Violy McCausland, president of merchant banking firm Violy, Byorum & Partners; and Stephen Robert, former CEO of Oppenheimer Group and current chancellor of Brown University.

Salomon, who owns a modest art collection, joined the MoMA board in 1993 at the suggestion of trustee David Rockefeller, with whom he had worked for years. Salomon was promptly assigned to the investment committee. "I certainly wasn't appointed because of my art expertise," he says.

Salomon in turn recruited Robert to the committee about five years ago. "I knew he had great investment judgment," says Salomon. In 1998 Menschel brought Cohen on board. "I joined because MoMA is one of the city's trea-sures," she says.

When Salomon joined the investment committee as its co-chairman, along with Blackstone Group's Peter Peterson, he turned for advice to longtime squash opponent Glenn Greenberg, a co-founder of New York­based Chieftain Capital Management. Both had once ranked among the top squash players in New York. While serving as a trustee of Yale University's endowment in the early 1990s, Salomon says, he also learned of Chieftain's "stellar" returns.

Chieftain joined the MoMA roster in 1993 and now oversees half the endowment's $125 million U.S. stock allocation -- the largest mandate of any MoMA manager in any asset class. For the five years ended December 31, 2001, Salomon reports that Chieftain posted an average annual return of 22.7 percent, versus a 10.7 percent return for the S&P 500.

Making use of connections is one thing, but isn't there a danger of going too far? What if trustees were to persuade the museum to hire unqualified money managers simply because of a personal alliance?

Museum policy prohibits investing in funds that are controlled by a trustee or an investment committee member. "It's not only a question of conflicts, it's just awkward," says Salomon. "Suppose the fund doesn't work out and you've got to fire a manager who works for one of the people on the committee? You don't ever want to be in that position."

Adds Gara: "Listen, would I like to be invested in Leon Black's funds? You bet. But there's enough access to the kinds of funds that give us returns within our risk profile without having to go down that path."

Certainly, the connections have gotten pretty close. In 2000, for example, MoMA decided to hire a money manager to handle its high-yield bond allocation, and one of the candidates it considered was TCW's Attanasio. Attanasio also served on the board of Global Crossing, the now-bankrupt telecommunications company founded by another Drexel alumnus, Gary Winnick, who is also a MoMA board member. MoMA officials say the endowment doesn't have any holdings in Global Crossing.

Hunter met with TCW, but the museum ultimately chose another high-yield manager. A few months later, though, TCW reappeared on the MoMA radar screen.

Back in the late 1990s, Cohen and other investment committee members had argued before the rest of the committee that the market turmoil that followed the collapse of the Russian ruble and the meltdown of hedge fund Long-Term Capital Management was presenting good opportunities in distressed securities. "We kept looking at Leon [Black] and saying, 'Now? Now? Now?'" recalls Salomon. "He eventually said, 'It's getting interesting.'" That was in the fall of 2000. By spring 2001 MoMA had hired its distressed manager -- TCW.

The investment committee gathers four times a year, usually six weeks after the end of a quarter, at a spacious conference room in Leon Black's offices a few blocks from the museum's midtown headquarters. The meetings generally last two hours, with the committee often devoting an hour to analyzing a single asset class in which it invests.

"On a committee like this one," says Steve Robert, "the chairman tends to exercise a lot of control over the outcomes of the discussions. People tend to have strong opinions, and they express them. Usually, there's something approaching a consensus."

Four years ago Salomon, then the co-chairman of the investment committee, and others judged that equities were overpriced and decided to tweak the endowment's hedge fund mix so that it favored market-neutral funds that used risk arbitrage and long-short equity strategies over long-only equity funds. What had been a 50-50 ratio between those two strategies became a 60-40 split in favor of market-neutral strategies.

Sticking with a heavy bet on hedge funds -- 22 percent of the fund was in the asset class at the time -- wasn't an easy call when Long-Term Capital Management collapsed in 1998. "At that time, hedge funds were not in vogue, but real talent was going there," Salomon says.

In 1998 Stephen Mandel Jr., a former Goldman Sachs retail analyst and an alumnus of Julian Robertson's Tiger Management Corp., founded Lone Pine Capital. "Bob Menschel led me to a lot of people [who knew Mandel], and I asked them a lot of very candid questions," Salomon recalls. "You're making a bet here. There's a big difference between being a very successful portfolio manager and running a company. In the case of Steve Mandel, we had a very high level of confidence." MoMA invested several million dollars with Lone Pine, a fund that closed itself to new investors almost immediately after Mandel opened shop.

"We've been able to get into the funds that are hot and maybe even oversubscribed," says Hunter. "That's usually because of an investment committee member."

Still, in what seems an effort to downplay the museum's hedge fund investments, Gara describes MoMA's portfolio strategy as "value-oriented and risk-averse."

"We'd rather hit singles and doubles than home runs," he says.

Perhaps. But MoMA trustees have been swinging for the fences with their 23 percent stake in hedge funds -- and hitting more than a few out of the park. The question is: Can they keep it up?

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