The creation and formation of a student managed investment fund (SMIF) is a risky proposition for all stakeholders involved in the process. These risks include reputational risks for the individuals involved, fiduciary risks for the school’s Board of Trustees and monetary risks for the university itself. The purpose of this paper is to explain and detail how these risks can be mitigated through specific oversight committee (OC) construction, distributional/benchmarking requirements for the fund and detailed trading rules (exit points, short sale constraints, loss provisions, etc.) for fund managers, which can all be codified in the bylaws of the SMIF.
This investigation is done through a specific case study – the 2017/2018 formation of the George Mason University SMIF. As head of the OC for the fund and lead architect in the creation of the fund for the GMU faculty, the statements below come from firsthand accounts of dealing with all parties of interest and firsthand knowledge of the year-long process of managing all risks, which culminated in being granted endowment capital from the Board of Trustees to officially begin the SMIF on May 1, 2018.
First, this paper details how a complete investment policy statement can be used to mitigate the fears and concerns of all parties that have a fiduciary duty to the university’s endowment (which the students will now be partially managing). These bylaws include statements on the risk characteristics of the fund, distributions back to the endowment, oversight features and benchmarking. Next, written into the bylaws of the fund can be several benchmarking and distributional requirements to mitigate the risk exposure of the SMIF’s holdings. Finally, aside from benchmarking constraints, another successful risk management technique can be rules written directly into the investment policy statement that define exit points, tracking error, short sale constraints and other rules for trading.
This paper offers a roadmap by which these risks can be mitigated through the content of an investment policy statement/bylaws. The author details several techniques that eventually led to all stakeholders at GMU in signing off on the formation of an SMIF, and endowment capital being given to the fund as a seed investment. This is a firsthand account of this process and the author has not seen it documented in the literature anywhere else.
Horstmeyer, D. (2019), "Formation of a student managed investment fund: risk management and oversight", Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MF-08-2018-0396Download as .RIS
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