A new investment strategy for the Cayuga MBA Fund at Cornell University's Johnson Graduate School of Management has paid off after only its first year.

A long/short equity hedge fund managed by 24 MBA students at the Johnson School, the Cayuga MBA Fund is one of the largest student-managed funds of its kind in the world. Begun in 1998, the fund changed its investment strategy in October 2002. It started to employ a market-neutral approach for investing the nearly $3 million it has under management, replacing an earlier, index-tilted approach that relied on the performance of the Standard & Poor's 500 index.

The Cayuga MBA Fund's goal: Produce positive returns to investors no matter how the market is doing, while helping students hone their investment skills.

The result: a return on investment of 19.19 percent in 2003.

"That's remarkable for a market-neutral fund, especially when taking into account our low volatility, which, at 7.8 percent, was less than half that of the S&P 500," commented Lakshmi Bhojraj, adviser to the fund and director of operations at the Parker Center for Investment Research at the Johnson School, where the fund is housed.

An article in the online publication HedgeWorld .com this January noted that the Cayuga MBA Fund ended 2003 with a beta of 0.09, which it called "a strong indication that its performance came from smart investment choices and not because of the general run-up of equity markets late last year." (A beta of zero would indicate no correlation between fund performance and market returns.)

Unlike commercial funds, "investors in the fund paid exactly US$0 [zero dollars] for that performance, since the Cayuga MBA Fund charges no management or performance fees," stated the HedgeWorld article, which also praised the fund for its savvy picks. The article noted that one long-term Cayuga MBA Fund investment, in a regional savings and loan holding company, yielded a 98 percent gain a year following purchase after the holding company capitalized on the boom in mortgage refinancings. And one short-term investment in a stock the students believed was overpriced yielded a 41 percent gain when sold two months later. The fund's investors are a group of 33 alumni and friends of the Johnson School. "We have a fiduciary responsibility to our investors, who expect to get a good return on their investment," said Bhojraj. "This is not a play fund. The goal of the fund has always been to provide investors with a competitive rate of risk-adjusted return and to enhance the educational and professional opportunities of Johnson School students through experiential learning."

The fund operates as follows: Student managers use quantitative models to screen stocks from each economic sector, analyze those that pass, then pitch long or short bets to fellow fund managers, faculty advisers and members of the fund's Investment Committee -- who typically are professional portfolio managers or research analysts. About 10 trades a week are made, from about 80 under consideration. Before an investment can be made, at least two-thirds of the student fund managers and two Investment Committee members must approve it.

The entire team of MBA student fund managers assemble quarterly reports, hold regular meetings and work to ensure that the fund's portfolio exhibits low overall risk and minimal market exposure. One student fund manager -- Alison Reichert, MBA '04 -- serves as a dedicated investor relations representative.

"As fund managers, we are making real-life, real-time investment decisions that affect the fund's value and our clients' investments," said Reichert. "None of the managers take this responsibility lightly. We learn new information about the market and its indicators every day and with every investment. The experience we have with the fund prepares us for our next job and our career. This is incredible hands-on learning that is really hard to find anywhere else."

Student fund managers are selected from a pool of about 50 who apply each year. They are chosen based on their grade-point average, academic performance in accounting and finance courses, career interests and ability to make stock picks and defend them in an interview setting.

The fund's board of directors -- a faculty adviser and two outside board members -- appoints the Investment Committee and bears ultimate responsibility for the fund's fiduciary performance. An advisory council, made up of distinguished members from the investment and academic communities, also provides expertise and advice on the management of the fund.

The Cayuga MBA Fund is open to all qualified outside investors. For information, contact Bhojraj at (607) 255-1135 or lr10@cornell.edu .