The finances of universities have long been managed in a conservative, unimaginative manner, as befits institutions whose leadership often seemed to view the world of finance as highly suspect.

But in the past decade or so, universities have been forced from their lofty reaches by the great equalizers of a stock market collapse and growing inflation.

Rising costs have been eating away at the financial underpinnings of academia, which has caused more and more university treasurers to conclude that to continue along the conservative investment route was to court disaster.

In short, university administrators came to the startling realization that their prized and valued endowments, the life-blood of academia, were disappearing.

A couple of Harvard University roommates (Class of '69) were among the first to see the threat to universities. Hunter Lewis, who is 33, and James N. Bailey, 34, have parlayed their knowledge to form a consulting firm called Cambridge Associates Inc., which has offices in Washington and Boston.

They established Cambridge just six years ago, and already, according to Lewis, its clients "represent slightly more than one-half the higher education endowment assets in the United States."

In the Washington area, Cambridge's academic clients include American University, Johns Hopkins in Baltimore and the University of Virginia in Charlottesville. St. Albans School here is one of its secondary school clients.

Nationally, its 50 or so college and university clients include Harvard, Yale, Stanford, Notre Dame, Swathmore, Vassar, Amherst, Colgate, California and Northwestern.

Cambridge's expertise on university finances has spilled over to other institutions. The firm is used by the Washington-based World Bank and the International Monetary Fund, as well as by Colonial Williamsburg, the Mystic Seaport in Connecticut, and the Ford, Rockefeller, Hallmark, Culpepper and United Presbyterian Foundations, among others.

Clearly, Lewis and Bailey have come up with something that is very much in demand. They say, moreover, that most of their clients are referred to them.

What's their secret?

"We're giving them a framework through which to see the economic reality of their situation and we're giving them ways to cope with that reality," says Bailey in describing what Cambridge does.

Says William Dietel, president of the Rockefeller Brothers Fund and an enthusiastic admirer of Lewis and Bailey: "They're making institutions face up to the fact that they will have to earn more money. Cambridge is telling them that it's time to look at ways to increase earned income that won't endanger their not-for-profit [tax] status."

Cambridge Associates had its genesis at the founders' alma mater, Harvard.

Back in 1973, Bailey was wrapping up work for degrees from Harvard Business and Law Schools and Lewis became one of two vice presidents at the Boston Co. after only 2 1/2 years on the job. Harvard had just changed treasurers, and the new man, George Putnam, decided it was time to look at how Harvard's huge, billion-dollar endowment was invested.

Putnam tapped Bailey and Lewis for the job. Bailey had come to Putnam's attention when, as a graduate student, he had done special projects for Harvard President Derik C. Bok.

They created a computer model to determine the best investment strategy to minimize the effect of inflation and maximize return on capital. As a result of their research, Harvard University set up a wholly owned, not-for-profit subsidiary, Harvard Management Co. Inc., which manages the institution's considerable assets.

Harvard also engaged five outside firms, each of which was given $25 million of endowment funds to manage. Not only were the five set in competition against each other, they also regularly reported back on new investment strategies to the management company, which was handling the bulk of the endowment.

At least in part as a result of their strategies, Harvard's endowment has grown impressively in the six years since their findings were implemented. It now amounts to about $1.7 billion, the country's No. 1 college endowment, just ahead of oil-rich University of Texas with $1.6 billion. ("Texas is the only significant one we don't work for," says Bailey.)

According to Walter Cabot, president of the Harvard Management Co., when the two-year Harvard project ended in 1975, the two had accumulated massive research that seemed to be applicable to other institutions.

"Having compiled all that data, I suggested it was a pity to let it go fallow. That was the real beginning of Cambridge Associates," he recalls.

The firm could have been based anywhere, but Bailey liked Boston and Lewis enjoyed Washington--so they set up offices in those two cities.

As luck would have it, Cambridge Associates was formed just after most universities had been through a financial disaster--the stock market collapse of 1973-'74. In the early 1970s, many endowments had shifted massive amounts of funds into equities.

"The market collapse almost wiped out the historic appreciation" of the endowment funds, says Bailey.

That disaster, together with growing concerns about inflation, had university treasurers primed for the creation of Cambridge Associates in 1975.

Cambridge Associates in the years since has become a vast computerized pool of experience to which clients contribute and from which they can draw. One university executive calls the firm "a clearing house of information."

Cambridge produces research reports and sponsors separate seminars twice a year for big and small university clients where they can compare problems and performances. "Meeting with the other treasurers helps us come up with new ideas," says Ray C. Hunt Jr., vice president and chief operating officer of University of Virginia.

The two associates won't discuss specific clients, but Bailey says they found that in the 1970s endowments had slipped on average 25 percent to 30 percent, and some as much as 60 percent, in terms of purchasing power. "It happened because the capital markets didn't give returns and some institutions had spending and investment plans that were unrealistic," says Bailey.

"Inflation is so high that it isn't necessarily conservative to spend only income. The capital return is eaten away by the inflation," says Bailey.

Now, instead of following the conservative approach of another day, Cambridge Associates' clients are advised to get involved in a sophisticated array of investment alternatives.

"In the 1970s, the biggest problem was the rate of return from the stock and bond markets," says Bailey. "We try to make clients think of an investment policy that includes oil and gas, venture capital, real estate and foreign securities."

Cambridge Associates found that many colleges and universities had balanced their budgets by deferring maintenance on buildings and equipment. "It's a horrendous problem," says Bailey, who adds that in "laying out the economic facts" to clients the firm restates the institution's budget to reflect maintenance. "We use it as a lever to make them understand that they can't put it off," he says.

The firm advises clients on virtually any financial problem, often the kind of problems that the clients are too close to.

For example, Hunt of Virginia says the firm helped the university determine whether a disproportionate amount of the endowment was invested in staff mortgages. About $28 million was out in mortgage loans, at an average of 9 percent a year. Cambridge Associates helped the administration revise the mortgage program to reflect the realities of inflation.

Dietel of the Rockefeller Brothers Fund, who is on the board of Colonial Williamsburg, was so impressed by Cambridge Associates' advice to that institution that he advised the deeply troubled New York Public Library to hire the firm.

Says Dietel about Cambridge Associates' intellectually tough approach to finances: "They make you see what your eyes perceive but your brain won't accept."