BOSTON (Reuters) - Harvard University's endowment fund, the world's largest university endowment, posted a small investment gain that bested several other top U.S. universities' returns but saw the value of the fund shrink as more was paid to university operations.

Harvard Management Co said on Thursday that it earned a 2.9% return in the fiscal year that ended June 30, leaving the total endowment at $50.7 billion. A year earlier it lost 1.8% amid tumbling markets but the endowment ended at $50.9 billion.

Returns from these schools are watched closely because they pioneered putting money into hedge and private equity funds.

The stock market rally earlier this year changed the picture for many investors.

However, with only an 11% allocation to stocks, "the endowment's FY23 return does not reflect a significant impact from public equity movements," Harvard Management's Chief Executive Officer N.P. "Narv" Narvekar wrote in a letter.

The school has a 39% allocation to private equity and a 31% allocation to hedge funds. Private markets lagged on the upside as the S&P 500 climbed 16% in the twelve months to June 30.

The portfolio is designed to "brace against significant swings in either direction, as it did last year when the FY22 return (-1.8%) was not meaningfully impacted by an overall double-digit public equity decline," Narvekar added.

He also noted that Harvard has a "somewhat lower risk level than many peer endowments."

Rival Yale University returned 1.8% while the University of Pennsylvania returned 1.3%. The Massachusetts Institute of Technology reported a loss of 2.9%. Columbia University gained 4.7% and Stanford earned a 4.4% return.

The endowment distributed $2.2 billion to Harvard's operating budget to support financial aid, faculty, research initiatives, and the school ended the year with an operating surplus of $186 million. A year ago it distributed $2.1 billion and ended with a surplus of $406 million. The school spent more as students returned in force to campus after the pandemic and wages and other expenses climbed.

(Reporting by Svea Herbst-Bayliss; editing by Diane Craft)