students count on their analytical finance skills to solve
real-world business challenges
time Matt Demaray had graduated from the Kellogg School in
2004, he had become well versed in the theories of analytic
had gained something else that went beyond the résumé
of the typical finance major: an attention-getting paper on
risk measurement for hedge-fund portfolios that still draws
the project helped bridge the abstract learnings in his finance
classes and the questions he faced as a senior analyst at
Huizenga Capital Management.
beneficial to the students and to the school when Kellogg
sponsors projects like this,” Demaray says. “If
you can’t apply theory in a real-world setting, it doesn’t
do you a lot of good.”
work was a product of the Kellogg Practicum in Analytical
Finance. An experimental course, the class was designed to
give top-level finance students the chance to apply their
skills to a practical finance problem before graduation.
the course, students evaluated new lines of business, assessed
portfolio allocations and explored risk-management strategies.
More than a dozen banking, investment management and consulting
firms offered projects to the class.
goal was to help the companies and give the students something
to think about. In the best projects, both things happened,”
McDonald, the Erwin Plein Nemmers Distinguished Professor
of Finance and the course’s co-founder.
worked out very well,” adds Ravi
Jagannathan, class co-founder and the Chicago Mercantile
Exchange Distinguished Professor of Finance. “The idea
was that the project should pull together what students had
learned and help them apply it. It helped them integrate everything.”
funds: A better risk metric
Ideas for projects surfaced both through student research
and faculty interaction with practitioners. The challenge
was then to distill these ideas into a project that a student
team could tackle in 10 weeks. “The framing of the problem
was most important,” Jagannathan says.
were geared toward analytic finance majors who had already
taken at least a half-dozen finance courses and were eager
to put their skills to work. McDonald says he was “astonished”
by what many of them accomplished.
were very high-caliber finance students,” says McDonald.
“It’s not just their IQs. They have an intellectual
seriousness coupled with talent. They felt they’d gained
a powerful set of tools, and they really wanted the chance
to bring them to bear on a project.”
a graduate of the Kellogg part-time
Managers’ Program (TMP), used his project to explore
an issue he had pondered during his day job at Huizenga Capital
Management. Demaray sought a better way to measure and manage
the risks of investing in hedge fund portfolios. He teamed
with Laurent Luccioni ’04 to address that question.
noted that hedge fund managers, who are not required to register
with the Securities and Exchange Commission, enjoy more flexibility
than do managers of traditional funds. Their underlying investments
are also far less transparent.
to understand the risks they’re taking becomes more
challenging than it does for traditional fund managers,”
Demaray says. “We tried to come up with a couple techniques
to think about risk and measure it.”
these techniques was multivariate regression analysis, a two-step
process that the students suggest works well for hedge-fund
managers who follow a consistent strategy over time.
earned Demaray and Luccioni the $10,000 Chookaszian prize,
awarded each year to the best student paper on risk management.
research with a larger sample is needed to confirm the findings,
Demaray says. “It’s an up-and-coming area in the
hedge-fund industry, and there’s no easy answer,”
a year after completing the project, Demaray says he continues
to receive calls from other hedge-fund managers interested
in his findings.
was a fun experience, because it was a project I would have
done anyway and it was nice to bring in some academic resources,”
Demaray says. “It brought additional energy to the process
and helped motivate me. We came to a much better place than
I would have had I been on my own.”
markets put to the test
Eric Mason ’04 also was eager to gain hands-on experience
in analytical finance before joining Lehman Brothers’
rotational program this fall. Mason was part of a team that
sought to determine what impact a change in stock analysts’
ratings would have on the price of a stock.
sponsor Mellon Capital Management handed 15 years of data
on the Dow 30 to Mason and teammates Andy Cantwell ’04,
Jon Goldberg ’04 and Ryan Heslop ’04. The students
reviewed the price of the stocks, the change in their ratings
and the price the subsequent month.
project was basically to see if analysts could have an effect
on the price of a stock,” Mason says. “Most of
the time their impact was negligible. But there was one area
where they had a major effect. If a stock had gone down, and
the analysts upgraded it during that month, that stock tended
to perform very well.”
were statistically significant — a result which surprised
Mason and his teammates. “We’re taught that in
an efficient market, an analyst recommendation shouldn’t
have an effect in the aggregate. This was showing that it
did have an effect. We weren’t supposed to get the results
their findings, the students researched some theories in behavioral
finance, an area the group found fascinating, Mason says.
It all added up to a uniquely rewarding experience.
was interesting to do something of this magnitude,”
Mason says. “I’d never really dealt with that
much data before. And it did give us more understanding of
the issues from a practical perspective.”
tangible to share’
Barclays Global Investors has commissioned several projects
to Kellogg students, including a study on the drivers of stock
and bond correlations.
Delis and Parag Dixit, both current TMP students, were among
those researching that issue for BGI, along with teammate
Steve Cotter ’04. “It was better than just taking
a course,” says Delis.“You’re doing original
assignment was hardly an unexplored topic. Many researchers
have tried to explain the correlation between stock and bond
returns, without reaching a consensus.
students proposed that three factors drive the correlation:
the 30-year mortgage rate, the 10-year bond minus the three-month
T-bill spread and the historic S&P volatility. These factors
can be interpreted as proxies for the risk-free rate, the
growth of the economy and the uncertainty in the market, respectively.
allocation could be improved based on a manager’s view
of these factors,” the students concluded.
findings have been distributed to BCI managers and have become
“part of the mix of everything we look at” while
making decisions, says Ken Kroner, managing director of the
global markets group at Barclays Global Investors. He adds
that he welcomes the chance to partner with Kellogg students
on such issues.
get some new, creative insights on problems we’ve often
been working on for some time,” Kroner says. “The
diversity of views is very beneficial for us, and they attack
the problems in a really fresh way. This is a great way to
bring students out of the ivory tower and research issues
of relevance to the real world.”