Change is good, especially if it makes money.
That's the happy result of a move to a market-neutral approach in October 2002 by managers of the Cayuga MBA Fund, a $3 million hedge fund managed by 24 MBA students of the S.C. Johnson Graduate School of Management at Cornell University, Ithaca, N.Y. The fund had been managed using an index-tilt based on the Standard & Poor's 500 index.
The fund returned 19.19% in 2003, which the faculty adviser, Lakshmi Bhojraj, said was "remarkable for a market-neutral fund, especially when taking into account our low volatility, which, at 7.8%, was less than half that of the S&P 500." Ms. Bhojraj is director of operations at the Parker Center for Investment Research within the Johnson School.
Since the fund does not charge management fees — usually 1% of assets for hedge funds — investors got to bank the entire return. The fund is open to qualified investors and now counts 33 alumni and friends of the Johnson School among its clients.
The 24 student managers of the Cayuga Fund are chosen from an applicant pool of 50 each year. Students fill the role of real money managers, preparing quarterly reports of the fund, holding regular investment meetings and monitoring the fund's risk and market exposure. Students apply quantitative models to screen stocks within economic sectors, analyze the remaining stocks and then pitch long or short bets to their fellow fund managers, faculty advisers and the fund's investment committee. At least two-thirds of student fund managers and two investment committee members have to approve a stock pick before the fund buys it. About 80 stocks are considered and about 10 trades are made per week.
Overseeing the student-run hedge fund are an investment committee, made up of professional portfolio managers and analysts; an advisory council, whose members are selected from the academic and investment communities; and a board of directors consisting of a faculty adviser and two outside board members.