Students simulate hedge fund investing

Students in most classes invest time in problem sets and papers. Students in Scott Bessent’s ’84 Branford College seminar invest millions of dollars in stocks and bonds.

Bessent’s seminar, titled “Hedge Funds: History, Theory and Practice,” goes beyond simply formulas and reading, although it has both. Bessent’s 18 students will construct their own model hedge fund and make mock investments throughout the semester. Already, the class has chosen a real prime broker and a law firm to oversee its model portfolio, Bessent said.

Students in the seminar will analyze stock indices, choose which investments to make and follow their virtual wealth throughout the semester, Bessent said. He said the fund will be “multi-strategy,” spanning across many asset classes.

Although Bessent himself has made millions of dollars over the past 20 years by managing various hedge funds, he said he is not trying to impress his students with the money. After the class students should understand that running a hedge fund is about more than making money, he said.

“I hope someone who wasn’t going to work at a hedge fund will, and someone who was going to will realize they don’t want to,” he said. “If they do go into the industry, they’ll be the kind of person who goes in with perspective, not a myopic view.”

During his senior year of college, Bessent took an investment-management seminar at Yale from a Goldman Sachs executive. After graduating with the intention of becoming a journalist, he said he was sucked into finance while taking an internship with famed investor Jim Rogers ’64. He made his fortune after placing his bets on the hedge industry, joining Soros Managment as an executive in 1990.

“Bessent’s one of the best in the business,” said Shazan Jiwa ’09, a political science major in the seminar who worked at a hedge fund last summer. “There’s no better way to learn about hedge funds.”

Fewer than 90 hedge funds existed in 1984, when he got involved in the business, Bessent said. Today, hedge funds control around $1.7 trillion in assets, or about half of the entire global stock industry.

Since Bessent’s days as a student, large numbers of Yalies have followed his lead into the world of finance. According to the Office of Institutional Research, 18 percent of the class of 2006 is currently employed in the business sector — a figure topped only by the 19 percent of 2006 graduates who work in education. Only eight members of the class of 2006 are pursuing postgraduate business study at this time.

The potential for a huge paycheck has attracted more than just hard-core economics students. Like Jiwa, several of the students in the class are not economics majors.

Christopher Borrero ’09, the president of the Yale College Student Investment Group, who is enrolled in Bessent’s seminar, said he intends to work at a hedge fund after graduation. But he said his interest in financial history played a large role in drawing him to the seminar.

“I view [the seminar] more as an academic undertaking, but I could see how some people might be there for the money aspect,” Borrero said.

Bessent does not deny the material appeal of his industry, although he said hedge fund managers’ wages may go down as the market grows. By law, hedge funds are restricted to accredited investors — mostly wealthy individuals, corporations and institutions.

Since hedge funds are only loosely regulated by the Securities and Exchange Commission, they have come under fire from more traditional economists and investors for their lack of transparency. Burton Malkiel, a Princeton economics professor who has worked for a mutual fund for 30 years, concluded in a 2005 study that hedge funds, with their elaborate fee structures, tend to exaggerate their returns because they can choose when to report their gains. For the average individual investor, they do not perform as well as cheaper mutual funds, Malkiel said.

But Bessent said it is impossible to generalize the hedge fund industry. Defining exactly what a hedge fund is consumed the entirety of the seminar’s first two-hour session, Bessent said.

“When you have 10,000 of anything, you’re likely to have fraud, scandals, bad performance and good performance,” Bessent said. Much of Yale’s endowment growth in the 1980s and 1990s was due in large part to investments in hedge funds, he said. As of June 2006, 23 percent of the University’s endowment was invested in hedge funds, according to the Investments Office.

If Yalies are to continue making their mark on the hedge fund industry, they must be excited by the work, Jiwa said.

“Some students just go for the money and the joyride,” he said. “But you have to have an interest in the markets to sustain you.”

Students are currently raising money for the mock fund. Bessent said he does not know when the fund might launch.

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