February 17, 2005

MBA Portfolio Surprises Pros

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The Johnson School of Management is raising eyebrows in investment circles nationwide after its student-managed Cayuga MBA fund posted nearly 20 percent growth for the second consecutive year, vastly outperforming comparable professionally managed funds.

Last year’s 18.6 percent return follows a 19.2 percent return in 2003. Over the same two years, the Hedge Fund Return Index (an index of comparable funds) posted returns of .33 and -2.38 percent, respectively.

The Cayuga MBA fund is managed by a group of 25 students in conjunction with NBA 512: Applied Portfolio Management.

After receiving a software-generated list of stocks screened for a number of market variables, the students research them further in sector-specific committees and bring investment proposals to the group. A two-thirds majority is usually needed for approval. The students are aided by one faculty adviser and a few outside investment advisers. The fund is currently in charge of $7 million from private investors, mostly Johnson alumni.

“This is performance learning,” said Randall Sawyer, public relations officer for the Johnson School. “Students are doing here at Johnson what they’ll be doing in six months at Fidelity.”

The Cayuga MBA fund is one of a growing number of hedge funds, which are different from classic mutual funds in that they not only buy stocks, but “short” them as well. That is, hedge funds also sell stocks in the expectation their prices will fall, then buy them back at lower prices, turning a profit in the process.

“The game’s always ‘buy-low, sell-high,'” said Chris Meredith grad, one of the 25 student mangers. “It doesn’t always have to be in that order.”

Because of the fund’s balance of short and long stocks, the direction of the market has no bearing on its annual profits. Meredith, who will be starting in the summer at Bear Stearns Asset Management, spoke enthusiastically about the program: “We’re using the same tools here that they use in the market to manage real money. I’m having a great time. This is job training for me.”

Because the Cayuga MBA fund program is so prominent within the Johnson school, becoming a student manager can be competitive. Each year’s 25 student managers are selected by the previous year’s on the basis of aptitude for and interest in hedge fund management. About 60 students apply for the program each year, according to Stephanie Payne MBA ’05, another of the student managers.

“Some of the people I’ve interviewed for the fund have told me that they came to the Johnson School specifically for this unique opportunity,” Payne said.

Similar student-managed funds exist at other business schools, but none with as much funds under management as Cayuga.

“The students have been thrilled with the last two years’ performance,” Payne said. “And our investors have been very pleased.”

Archived article by Ben Birnbaum
Sun Staff Writer