It started out with a $10,000 investment by the class of 1998, but Cornell's student-run Cayuga Fund now operates as an enhanced index fund and has made an 85 per cent return since October 2002.
Not many hedge funds outperformed the market in 2008, but the Cayuga Fund ended the year in the black, up 0.42 per cent. The fund now has $12m of assets under management, making it one of the largest students-run funds in the U.S.
Each year, between 20 and 30 second-year MBAs are selected to enrol in the Applied Portfolio Management class, taught by Professor Sanjeev Bhojraj, who says he had to “disappoint” half the applicants this summer due to the popularity of the class.
The lucky ones act as portfolio managers of the fund. Under Professor Bhojraj's supervision, each member participates in one of seven teams that cover key economic sectors in the S&P 500 share index, and has the opportunity to put investment ideas before a class vote.
Being a member of the Cayuga Fund is a big selling point with recruiters says Stephen Kapsky, one of last year's portfolio managers. Prior to attending Johnson, Kapsky was on the sell-side of the financial business at JP Morgan and Citi respectively; now his career's shifted over to the buy-side, and he’s working as an analyst at a hedge fund covering financial institutions.
“Running the Cayuga Fund helped to catch the attention of recruiters,” says Bronx-born Kapsky. “Cayuga Fund experience is as close to real-world experience as you are going to get from a business school education... [the school provides] state-of-art facilities and applications to conduct intensive equity research such as Bloomberg and FactSet, which you will find at most firms on the Street.”
But getting into Professor Bhojraj's class wasn't easy, recalls Kapsky: “You need to articulate your personal story and provide examples based on your prior experience that will convince the interviewer you have something to add to the fund,” he says. Applicants were asked to deliver a “serious” stock pitch, for which Kapsky says not many were prepared.
For Kapsky, who did his first degree at the University of Virginia, the Cayuga Fund is the reason he came to Johnson: “Working with Professor Bhojraj made my entire business school experience,” he says. “Professor Bhojraj built an entire curriculum that married academia with real world practice, and brought in guest lecturers that provided unique perspective into the world of asset management.”
Another feature of the Cayuga Fund is the level of team effort involved. Students and professors challenge portfolio managers on their stock recommendations and investment theses so that only the best ideas are voted into the portfolio.
Despite its success, the Cayuga Fund is now closed to outside investors. Professor Bhojraj says the action was taken to emphasize the fund's educational purpose: “Our original purpose was educational, but people have been investing based on performance... Now we’re starting to feel that people are just taking advantage of the return.
“Education is what we focus on and the only thing we care about,” he explains.
Investors are mainly Cornell alumni. However, since Johnson doesn't charge any fees, there have been many other outside investors. All the returns from the fund will be returned to them.
Though there are several of student-run funds in the US, Professor Bhojraj says Johnson's Cayuga Fund is different: “Most of the other funds are run by clubs or advisors, and many are paper-money. Because… running this fund is not an activity but a part of a course, it makes us seriously unique.”
And Johnson School students love it. According to Professor Bhojraj, students are “seduced” by the experience. “They realize the pleasure of running the fund and even losing the money, and a lot of them end up wanting to pursue a profession in fund-management,” he says.
Other business student-run funds
Run by a select group of second-year MBA students at the Robert H. Smith School of Business, the University of Maryland. The fund was established in 1993 and has grown to approximately $2 million.
Performance since July 31, 2007: down 1.7 per cent.
The MBA Investment Fund
Created to enable MBA students in the McCombs School of Business at The University of Texas at Austin to obtain real-world experience of managing investment portfolios and developing relationships with clients. It started with $1.6m in December 8, 1994 and now has approximately 60 investors and $13.5 million under management.
Performance: returns not disclosed.
The Wharton affiliate University Venture Fund has over $23 million under management. Students raise capital, perform due diligence for potential deals and make investments. The fund started in 2003 with $18 million in assets under management.
Performance: not available.