HedgeFunds: An Analytic Perspective

by Andrew W. Lo

The hedge fund industry has grown dramatically over the last two decades, with more than eight thousand funds now controlling close to two trillion dollars. Originally intended for the wealthy, these private investments have now attracted a much broader following that includes pension funds and retail investors. Because hedge funds are largely unregulated and shrouded in secrecy, they have developed a mystique and allure that can beguile even the most experienced investor. In Hedge Funds , Andrew Lo--one of the world's most respected financial economists--addresses the pressing need for a systematic framework for managing hedge fund investments.



Arguing that hedge funds have very different risk and return characteristics than traditional investments, Lo constructs new tools for analyzing their dynamics, including measures of illiquidity exposure and performance smoothing, linear and nonlinear risk models that capture alternative betas, econometric models of hedge fund failure rates, and integrated investment processes for alternative investments. He concludes with a case study of quantitative equity strategies in August 2007, and presents a sobering outlook regarding the systemic risks posed by this industry.

Genres: Finance, Nonfiction

376 pages, Hardcover

First published April 28, 2008

About the author

Andrew Wen-Chuan Lo is the Charles E. and Susan T. Harris Professor of Finance at the MIT Sloan School of Management. Lo is the author of many academic articles in finance and financial economics

Reviews

[Joe Malicki · Rating 3 out of 5]

Interesting, but somewhat exploratory and limited in scope.

It's primarily a book about:

1) the Sharpe ratio sucks as a measure of portfolios with a lot of tail risk (like put-writing)
2) If you see a hedge fund with a high Sharpe ratio, and can only see summary statistics and return series, chances are high that it's just taking on tail risk
3) How to measure liquidity risk, including CAPM and Sharpe ratio-like models.

It's an interesting book on an interesting topic, but it's very hyper-specialized and not conclusive enough to be a final read.

[Clare · Rating 2 out of 5]

Most useful for its final chapter, What Happened to the Quants in August 2007, but all of Andrew Lo's work is valuable.