The University Record, July 10, 1995

Endowment not affected by Common Fund losses

The University may face up to a $1.5 million reduction in return on its investments due to unauthorized transactions by a money manager for The Common Fund.

The Common Fund is a nonprofit membership consortium devoted exclusively to enhancing the financial resources of educational institutions through its investment programs. The University is a charter member of the fund, which was founded in 1971. It has 1,421 participating member institutions.

In making investments for its member institutions, The Common Fund offers its clients 35 separate investment funds, hiring professional money managers to run the portfolios

The University was notified on June 30 by The Common Fund that overall returns on The Common Fund's investments would be reduced by as much as $128 million because of actions by a rogue trader at First Capital Strategists, a firm hired by The Common Fund to manage its security lending and arbitrage program.

That program has been run by First Capital Strategists since 1981. The losses are attributed to a First Capital trader engaging in unauthorized transactions involving the execution of an index arbitrage transaction without fully completing the appropriate corresponding hedge.

In an arbitrage transaction, a trader takes advantage of a difference in prices in different markets. As a simplified example, gold may be selling at $400 in London and $404 in New York. The object is to buy in London and sell in New York at the same time. The First Capital trader did not do this, resulting in the losses.

The University has approximately $745 million invested with The Common Fund, according to Executive Vice President and Chief Financial Officer Farris W. Womack. "The University endowment fund is not affected. Our exposure is limited to that portion of the operating revenues that is invested in The Common Fund's Intermediate Cash Fund. This investment was $114 million on June 30.

"We expect to see our investment return on the Intermediate Cash Fund lowered by 1.3 percentage points for the fiscal year ending June 30. At the end of May, the investment return on our $114 million in the Intermediate Cash Fund for 11 months net of the loss was 6.9 percent." Womack says.

"If there were no loss, the investment return would have been 8.2 percent for the period. This difference in returns results in an estimated $1.5 million reduction in investment return."

Womack adds that The Common Fund "intends to pursue aggressively the interests of its members in this matter."

The Common Fund has selected Goldman, Sachs to control the management of the portfolio. It also has retained the law firm of Cravath, Swaine & Moore, with the accounting firm of Price, Waterhouse assisting.

The loss has been reported to the Securities and Exchange Commission and the Commodities Futures Trading Commission.