David Turner reports on a deal structured by Clare College, Cambridge:
One of Cambridge’s oldest colleges has borrowed money for the first time in its 700-year history in a "sensational deal" devised to take advantage of the investment opportunities presented by the credit crunch…
Clare said: "On the basis of detailed research the Investment Committee believe that real returns from equity investment over the next 40 years should be substantially greater than the cost of the borrowing."
This belief is reinforced by Clare’s view that stock markets are now at or near their bottom.
But this is exactly the same deal I was writing about back in June, when absolutely nobody thought that stock markets were at or near their bottom. This is not an opportunistic investment driven by the fact that stocks have fallen; instead, it’s an investment which was pitched to Clare when the FTSE was over 6,000.
In a case where it pays to make such decisions slowly, Clare has now decided to jump in with the FTSE at about 4,000. Clearly, if the investment made sense at 6,000, it makes a lot more sense at 4,000. But on the other hand, the fall in the stock market is proof of why these deals aren’t generally a good idea.
In June I talked about the opportunity costs of borrowing money now, thereby cutting off a certain amount of borrowing capacity should some unexpected expenses arise in the future. But it turns out that there was an even bigger opportunity cost of investing back then, thereby cutting off the opportunity of investing at a much lower price now. Clare got lucky, and delayed the decision so far that it was made easier by falling stock prices. But I’m still not convinced that universities make for particularly good hedge funds.