MBA students start fund with their own money and Queen’s cash to do battle on Bay Street

Each week, the members of the executive team of a brand new company called QUAAF must make a tough call: Do they meet in the students’ pub or at the campus coffee shop?

The company’s full title is Queen’s University Alternative Asset Fund (QUAAF) and the four members of the executive are all MBA students. Although the company’s name might suggest the four senior executives are all about imbibing, in reality, these guys are much more interested in hedging their bets about the future.

Their mandate is to play with the big boys on Bay Street in the sometimes murky world of hedge funds, helped along with financing to the tune of six figures provided by Queen’s. The four students—CEO David Yao, chief risk and compliance officer Peter Szaflarski, chief investment officer Brendt Lambert, and business development officer Joe Sauret—were part of an original eight-person group that pitched the idea to QSB. To persuade the administration they were serious about their proposal, the group of eight each sank $6,000 of their own savings into an investment fund and invested in commodities and options producing a quarter’s worth of solid returns.

“The main purpose was to show the staff that we were serious about this and willing to put our own skin in the game,” said CEO David Yao, 25, of Regina. “We’re students, and any amount of money is hard to come up with. It showed our dedication.”

The gambit worked. The University has since helped the students to create a notional firm with proper corporate structure and backed them with start-up funds in six figures to invest in hedge funds.

“One of the challenges is that the MBA is a one-year program, and, if this is to be a sustainable fund, how do we ensure it can be turned over from one class to the next and still have a consistent investment theme?” said Peter Copestake, Executive-in-Residence at QSB and the man with his hands on the steering wheel of the new venture.

“Because you need some kind of continuity, the four individuals in the initial executive group cast around among their MBA peers and said we’d like to hire on a whole group, including portfolio managers and analysts, to look at this universe of investment opportunities,” he said.

In return for a chance to get in on the action, the MBA students recruited all had to sign contracts promising to stay in touch with QUAAF even after they graduate and to become alumni supporters of the fund to ensure that the next round of MBA students will be able to “fill their shoes when they leave.”

The first order of business for the MBA students was to do their homework on hedge funds.

Copestake, the former global treasurer of Manulife Insurance, believed the safe strategy going forward was to create a “fund of hedge funds,” a short-list of hedge fund managers with the best track record for investing. “We’re going to be able to develop a database of hedge funds, which doesn’t exist today, and do a true apples-to-apples comparison, which is a big exercise, but will be very valuable in its own right,” he explained. “Part of what we are doing here is trying to identify those hedge funds which we believe will outperform but do not entail excessive risk.”

Creating a short-list of surefire winners has been a challenge, because there is no public database available and private databases cost big money.

The Queen’s MBA team did its own research to whittle down 100 hedge funds in Canada to a shortlist of eight, attempting to limit QUAAF’s exposure to risk.

“We hope to do the first investment within the next month [March],” said chief risk officer Peter Szaflarski, 30, of St. Catharines, ON.“With any start-up, there is some uncertainty about the future and there’s a learning curve attached to that, but the whole team is really looking forward to going forward.”

The only member of the QUAAF executive with real hands-on experience of hedge funds is also the only American student in the group, chief investment officer Brendt Lambert, 30, of Dillon, SC. Lambert was working on the trading floor of the Chicago Board of Trade in 2008 when the Bernie Madoff scandal broke.

“On a commercial desk, we got to see the execution of a lot of these hedge funds and got to see the nitty-gritty details of the actual funds,” Lambert said. “You saw that there was no clarity in the field of hedge funds. It seems to be a very dark, lack-of-information universe.”

The fourth member of the executive, 26-year-old Joe Sauret of Toronto, can at least claim that his business experience equips him to see the big picture. While taking a philosophy degree, he supported himself by running a successful painting business.

“I think it’s important in terms of the executive committee to come from a well-rounded background,” he said with a laugh.

“The support we received was tremendous. This school definitely has a culture of innovation and excellence and they saw our idea as a way to continue with that tradition.”

* This Toronto Star article by Paul Dalby has been abridged with the author’s kind permission.