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There's a 10% nominal return, but a 7% real return. Harvard beats this by 3% annually, which is huge!

"Adjusted for inflation, the historical average annual return is only around 7%. " from your link.

the real test is how well Harvard's fund does in year where the s&p 500 is doing poorly.

No, the real test is sustained performance over time in the form of an average.

If the S&P 500 falls 10% in a given year, I can hold 100% cash, light 5% of it on fire, and outperform the S&P 500 - that doesn't make it a sound long term strategy.

Are we also omitting the fact that it's a nonprofit and therefore has grossly better tax treatment?

thats not how taxes work... I am not a lawyer/cpa but if I understand correctly, any investment income harvard receives would be taxed at the normal rate for that type of activity.