January 26, 2009

Student Hedge Fund Ends Year in the Black

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In the midst of the country’s economic recession, the Johnson Graduate School of Management’s Cayuga Fund, a hedge fund run by faculty and students, reported a 0.42 percent gain for the 2008 business year.
Although the fund’s investments decreased by 1.29 percent in the fourth quarter, this $12 million hedge fund, finished the year ahead, especially relative to the performance of its benchmarks. Indexes like Hedge Fund Research Equity Hedge Index and the Hedge Fund Research Equity Market Neutral Index reported 25.45 percent and 1.16 percent losses, respectively, in 2008.[img_assist|nid=34404|title=Cayuga MBA Fund Returns|desc=|link=node|align=right|width=|height=0]
“In the context of this turbulent environment, the Cayuga Fund’s performance was strong, driven primarily by prudent risk management strategy,” stated the Cayuga Fund’s quarterly performance report.
Prof. Sanjeev Bhojraj, accounting, and faculty director of the Parker Center, which focuses on teaching Johnson School students investment research and asset management, pointed to superior stock selection and disciplined risk management as the two factors responsible for the Cayuga Fund’s ability to stay in the black.
“I believe the reason we have beaten other hedge funds with similar styles is because we are more disciplined in our approach,” Bhojraj said. “The execution of our stock selections and risk management is better.”
Stephen Kapsky grad, a student portfolio manager for the fund, explained the conservative strategy of the hedge fund. By utilizing a market-neutral strategy — matching every position with an opposing position — the fund has been able to succeed in a harsh environment.
“We always try to take a market-neutral stance, and this has been one of the strategies that has really outperformed the others,” Kapsky said. “Say we go long [buy] with one stock, we short [sell without owning] another similar stock or index in order to guard ourselves from volatility.”
Although the economic forecast for the coming months is uncertain, the Cayuga Fund hopes to stay positive during the recession.
“Each sector comes up with an analysis and is responsible for a report for the fund’s investors,” Kapsky said. “The second task ahead is for each to come up with five new investment ideas — stock pitches.”
Established in 1998, the Cayuga MBA Fund started by closely tracking the S&P 500 and then shifted its strategy, transforming into a “long-short, market-neutral equity hedge fund,” according to the fund’s website. Although there are several other university-based funds at other business school, across the country, Bhojraj sees the Cayuga Fund as a project set apart and distinct in nature.
“There are not that many of these types of funds that use real money, and the ones that do manage real capital only allow the firm to go long,” Bhojraj said. “Shorting is a much riskier decision-making process and is a completely different ball game.”
Making money is not the firm’s sole objective. Bhojraj explained that the students managing the fund are all enrolled in his year-long course.
“Most business schools run this type of program as part of a club and not integrated into the curriculum,” Bhojraj said. “The fact that the Cayuga Fund is an integral part of student coursework in a class called NBA 512: Applied Portfolio Management makes us different.”
To enroll in the class, students must go through a selection process that includes a formal application and interview.
“Acceptance varies a lot from year to year,” Bhojraj said. “We usually take around 24 or so students, but this year we have 32 students because there were so many qualified applicants.”
The success of the Cayuga Fund not only looks impressive for Cornell’s Johnson School, but also for its students, according to Bhojraj. To be able to manage a hedge fund with a group of students is a powerful learning tool, and gives students a great deal of real-world experience.
Sanjay Ranade grad, is the student trader for the fund. He worked at Bear Stearns before coming to Cornell. While his background was mainly in fixed income, he enjoyed Bhojraj’s class because he was able to learn about the stock market and trading strategy.
“The reason I joined was because I came from a fixed income background and didn’t have much experience with the stock market and equity research,” Ranade said. “This course has definitely given me a better understanding of how people think about the buying and selling of stocks.”