2009 Headlines
Johnson School MBA student-run hedge fund down slightly in first quarter 2009
Short positions prove more profitable than long
April 20, 2009 | Ithaca, NY | The Johnson School at Cornell University's student run Cayuga MBA Fund experienced a challenging quarter, posting a return of -1.03%, compared to -2.49% for the HFR Equity Market Neutral Index and 0.76% for the HFR Equity Hedge Index, which benefited from a strong March performance. The S&P 500 was down 11.01% over the same period. While the Fund has identified a number of strong performers on the long side, its short positions have provided the bulk of the horsepower for 2009 thus far.
One strong long position was Genentech (DNA). Although the market doubted Roche's ability to close the $89/share tender offer for Genentech amid the current credit crisis, Cayuga Fund students saw an opportunity when Genentech shares were trading below $73 in the beginning of December. Given Roche's strong financials, Genentech's robust pipeline and business synergy between the two companies, students believed the deal would eventually close above $90/share. The revised $95 tender offer from Roche was accepted in March.
MGM Mirage (MGM) was one of the strongest short positions for the fund. With consumer confidence continuing to erode and discretionary spending pulled back, Cayuga Fund students believed that customer traffic would continue to decrease and gambling revenues would continue to fall. Casino stocks also tend to operate with high amounts of leverage because the lodging and gaming business is very capital intensive. With the tightening of the credit markets, MGM was at risk of breaking existing debt covenants and announced in March 2009 that it was at risk of defaulting under debt agreements for the rest of the year.
"The first quarter proved to be a roller coaster ride for the S&P 500. While the latest rally could indicate the worst is behind us, the economic data still leads us to believe that true recovery is still some time away. We expect to see volatile equity markets with investors possibly retesting March lows," said Andy Herr (MBA '09), investment relations representative for the Cayuga Fund. "However, we can already see increased strength in certain sectors and expect a decrease in the correlation between individual stocks and the markets as a whole, giving the fund opportunities to generate absolute returns through vigilant stock selection and risk management."
The Cayuga MBA Fund is an investment vehicle that aims to provide a competitive rate of risk-adjusted return to its investors while enhancing the educational and professional opportunities of Cornell's Johnson School MBA students. It is supported by the analytical platform of the Parker Center, cutting-edge research by faculty members, and extensive participation by student portfolio managers. The Parker Center is a classroom providing real-time stock quotes, international data feeds, and financial analysis software and data valued at more than $1.8 million per year in licensing fees and comparable, if not better, than the resources found at many Wall Street firms.
The Cayuga MBA Fund is managed by 32 portfolio managers, including two quantitative analysts, a trader, and an investor relations manager who, under the guidance of faculty and outside investment advisors, work to fulfill the investment objective of the fund to achieve consistent positive returns that are uncorrelated with equity market benchmarks, and to maintain significantly lower volatility than the broader market.
More information on the Cayuga Fund and the Parker Center can be found online at the Parker Center Web site.
