Investing and Learning / Sagehen Capital
Hedgefunds 101

By Mary Marvin

Shorting a stock takes some guts. Even though the profit potential can be substantial, it’s a risky proposition with almost unlimited downside. That’s why it’s usually a move made by seasoned market professionals—or students who do their homework.

In 2007, shortly after Sagehen Capital Management (SCM) was founded, members of the student-run hedge fund decided to short Countrywide Financial, months before the company was brought to its knees by the subprime meltdown.

“It was the right decision, made for the right reasons,” says Danny Scinto ’09, one of the three co-presidents of the fund. “We had a very detailed report by Jacob Ziemann (’08) about how the housing market was overvalued and mortgages were going into default.”

SCM was founded anonymously by a Pomona alumnus who committed $1 million for a minimum of four years to establish an international equity long/short portfolio, managed entirely by students. The fund had an impressive first year, says Scinto.

“We had a 13.72 percent return, which outperformed the major indices by about 8 percent.” Even though the fund has been down so far this year, it has managed to hold even with the indices.

The portfolio’s performance in 2007 resulted in a $109,656 donation to the College, which reflected returns above inflation and included a $25,000 minimum annual donation, promised by the donor regardless of market performance.

Profits from the prescient short of Countrywide, however, weren’t part of that total. The students decided to cover the short before the stock collapsed, partly because several of them were leaving for summer jobs in the financial industry and were worried about potential conflicts of interest. “An amazing idea and bad timing,” says Scinto.

While SCM has engaged in some exotic trading, including a merger arbitrage between two palm oil companies from Singapore and Malaysia, the majority of its investments are long term. “Our guru is Warren Buffet,” says Scinto. “We think if you take three- to five-year views on an investment, focus on value and buy things cheap, you’ll make money.”

Meticulous research has been one of the keys to SCM’s approach to managing its portfolio and controlling risk. Studying worldwide trends in carbon trading prompted an investment in EcoSecurities, a company that develops and trades carbon credits; a close reading of another company’s contract uncovered a wrongly priced oil security that led to a complicated arbitrage deal and a $10,000 profit. SCM members even took a field trip to Irvine to talk to senior management at Composite Technology before deciding to invest.

At weekly meetings, those detailed findings are presented to SCM’s 25 members, representing students from a range of majors (although econ majors are the majority). In addition to its three presidents—Scinto, Levon Balayan ’09 and Thomas Church ’09—SCM has four students who head executive committees on Asia, Europe, the Americas and global positioning. The donor, who worked closely with the students to set up the fund, also has veto power (but has yet to use it) and handles the transactions.

“The students are managing a real portfolio,” says Ludwig Chincarini, assistant professor of economics and SCM faculty adviser. “Rather than studying a textbook they’re actually investing, and there is no way you can simulate that in the classroom. They’re learning the tricks of the trade, taking something from an idea to a trade on an exchange and seeing how it performs. The learning experience is huge because that’s what you do in the real world.”

That was the goal of the donor, who wanted to promote the study of finance at the College and initially worked with Benjamin Ginsberg ’07, then head of the Pomona College Investment Group (and later the first SCM president) to set up the student-run fund. The money raised by SCM has been targeted for finance education, including speakers, workshops and departmental expenses.

The hands-on experience provided by SCM has already had some real world consequences, giving several students the financial background they needed to get summer jobs at investment banks. Scinto, who worked at the sales and trading program at JPMorgan Chase & Co., says SCM has done more than help him land a summer job.

“I didn’t know what finance was before my sophomore year,” says Scinto, a math major from Santa Ana, Calif. “SCM has been an amazing experience. It definitely changed my plans and helped me find my life’s passion.”