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Colleges learn hard lesson on trader's losses

The University of Michigan will make $1.5-million less than expected in investment returns this year. And Hope College, also of Michigan, will have to do without an anticipated $100,000.

They were among more than 1,400 colleges and universities hit by a trader's estimated $128-million in unauthorized losses over the last three years.

The Common Fund, a non-profit fund that oversees a total $20-billion endowment pool for schools of all sizes, alleged in a letter to its members Monday that the 39-year-old senior trader "took elaborate steps" to hide risky transactions from the fund and his employer, money-management firm First Capital Strategists Inc. of York, Pa.

The fund's president, David K. Storrs, said in the letter that trader Kent Ahrens failed to hedge stock-market bets against unforeseen risks beginning in 1992.

School officials said Monday the impact on their finances would be minimal because the principal on their investments won't be diminished. Instead, returns will be lower than expected.

But the size of the loss left the academic and investment communities wondering how one individual could conceal millions of dollars of losses from his employer and the fund for so long.

Norman Herbert, the University of Michigan's treasurer and investment officer, described his reaction on learning about the losses as "disappointment, shock that one individual could do something like this."

Of the $745-million in University of Michigan money that is managed by the Common Fund, $114-million is in one of the affected funds. The money, earmarked for building projects at the school, will earn 6.9 percent return this year instead of the originally projected 8.2 percent, Herbert said.

"It's just a lower return. To that extent, it does not affect the operating budget," said Herbert, who is also a trustee of the Common Fund.

Hope College, a Holland, Mich., school with about 2,800 students, said it will earn $100,000 less than expected after investing $9-million in two First Capital funds. Its total endowment fund is about $57-million.

"It won't have an immediate operational impact, but in the long term it will because the value of our endowment will be less," said spokesman Tom Renner.

The Common Fund, based in Westport, Conn., said it discovered the losses last week when Ahrens admitted the scheme following an inquiry launched by the fund. The inquiry was prompted in part by last year's $1-billion collapse of Barings PLC, also blamed on one trader.