Pitching a Hedge Fund

"The best way to learn about hedge funds is to work at one," said Leon M. Metzger, who teaches a course on hedge funds at SOM. "In this class, we try to simulate the experience, from start to finish." The syllabus for the course is a 45-page hedge fund-style offering memorandum, and students work in groups to develop their own proposals for new hedge funds.

The culmination of the semester-long course comes when students present those proposals to a panel of industry experts. During two class sessions near the end of the Fall 2008 term, five groups of students made 20 minute pitches for new hedge funds. The judges, who included hedge fund traders, managers, and advisors, showed their respect for the students’ carefully prepared pitch books and PowerPoints by interrupting them with questions (“Why would you be able to do this better than the FDA or pharmaceutical company advisory boards?"), and follow-ups ("Will there be side pocket investments?"), and doubts ("Relying on non-exclusive consultants is an issue.").

Once each pitch was done, the panel provided critiques and insights gathered from years in the field and days spent sitting through precisely these sorts of pitches from actual funds. Explaining the tough questioning, one judge said, "The investors who aren’t brutal aren’t here, they’ve already lost their money." Or as another understatedly put it, "This is not Jerry McGuire. You don’t get me at hello." But aspects of many proposals were highlighted as real opportunities, some of which students are considering pursuing after graduation.

Drew Skelton ’09 was part of a student team that presented an alternative energy hedge fund. He said, “Getting up there and presenting was a little scary at first, but once we got rolling I had the feeling we could anticipate their questions and get them excited about our proposal.”

Metzger, who is a lecturer in finance at SOM and former vice-chairman and chief administrative officer of Paloma Partners Management Company, has been using this format to teach hedge funds since 2004, first at the Wharton School, and since 2006 at SOM. But this semester he said he threw out at least 40% of the planned curriculum in order to learn from what has been taking place in the world financial markets.

Hedge funds have been hard hit by the economic crisis. But it has been an exciting time to be learning about them, even for the long-time industry insiders. That became apparent as the panelists had a turn on the hot seat once student presentations were done. Opinions varied, but the sense of engagement with economic and political issues of the day was very clear.

Though it wasn’t apparent what form change will take, that this is a turning point for hedge funds was broadly understood. Some expected a large number of funds to close either because of investors withdrawing money or because smaller funds wouldn’t be able to maintain operations with the bulk of income coming from a percent taken from total returns. Others saw the pace of innovation in techniques increasing as hedge funds become more visible and institutionalized.

Asked about potential regulation that may be imposed on hedge funds most said that the specific financial instruments should be regulated but not hedge funds as a vehicle.

Kelsey Biggers of K2 Advisors, a fund of hedge funds, said he made the trip to New Haven because, "It’s an enjoyable way to step back and look at the industry in almost a visionary way." He added that the time with the students was valuable, "This industry is going to be recast and this is the generation that will do it."

Steve Bruce of Abernathy and McGregor, a public relations firm with many financial industry clients, echoed the sentiment. "These are the best and brightest," he said. "You can see how much they enjoy the work, and it’s clear they actually get it."