The Ivy League institutions Harvard and Yale have been battered by the financial crisis, losing a combined $18bn (£10bn) in their endowments over the last year.

America's two richest universities, usually known for their investing prowess, warned of further cuts after seeing their endowments shrink by 30% due to problems with their hedge fund and private equity portfolios.

Harvard's endowment dropped by $11bn to $26bn in the year to June, a fall of 30%, according to the Harvard Management Company, which oversees the endowment. Excluding donations and distributions, the decline in investment performance amounted to 27.3%, the biggest in four decades.

The losses forced the 373-year-old university to lay off 275 staff this summer – its first ever – and halt plans for a campus expansion across the Charles river in Allston, Massachusetts. The endowment covers a third of its annual budget.

Yale's endowment fell by $7bn to $16bn over the period, a worse-than-expected drop of 30%.

"We want to alert you to the fact that another round of reductions will be necessary," Yale's president, Richard Levin, wrote in a letter to the Yale community.

"Only a small fraction of our endowment is invested in publicly traded securities, so the recent stockmarket rebound has not had a substantial effect," Levin said. "The bulk of our endowment remains invested in illiquid assets, which have not begun to recover their value."

This means that Yale will have an annual deficit of $150m from 2011-14, he wrote. He said the school would cut non-salary expenses by another 5% this year, having already reduced staff and non-salary expenses by 7.5%.

Yale, based in New Haven, Connecticut, has cut 600 jobs and postponed construction plans worth $2bn.

An initiative to improve administrative services will be scaled back and the university will cut spending on its West Campus development by more than 25%.

Both Harvard and Yale invested heavily in hedge funds, private equity and timber in recent years. Last year many of their bets did not pay off and both lost far more than other universities, which focused on stocks and bonds, and where endowments shrank by 18% on average, according to the research firm Wilshire Associates.

Jane Mendillo, head of Harvard Management Company, said its portfolio was affected by "extreme volatility and financial dysfunction". She blamed Harvard's reliance on illiquid asset classes for the losses. For years, Harvard kept hardly any cash on hand but now plans to keep as much as $500m.

Mendillo said in her report that "nearly every asset class did poorly," and she called the past year "very likely the most challenging period in modern times for the financial markets as well as for the Harvard portfolio".

She added: "We expect to see a prolonged period of instability and slower growth in some markets."

Harvard's private equity investments declined by 31.6% while hedge funds saw an 18.6% fall.

Mendillo has introduced changes including bringing more assets under internal management rather than using outside money managers, pulling money out of some hedge funds and exiting some private equity funds, resulting in a $3bn cut in commitments to private equity and real estate funds. Harvard is also reducing its exposure to real assets such as property, timber and commodities.

Despite Harvard's loss last year, the endowment has still returned an average of 8.9% every year for the last decade, while other funds have risen by just 3.2% on average.

Brown University also suffered large losses, with its endowment falling by nearly 27% to $2.04bn.

• This article was amended on 17 September 2009. The original referred to campus expansion across the river in Cambridge. This has been corrected.