Hedge Funds
An Analytic Perspective
Published on 18. May 2008
Book
Hardback
376 pages
978-0-691-13294-5 (ISBN)
Description
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.
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.
Reviews / Votes
Anyone who is considering investing in hedge funds, or is involved in regulating the financial-services industry, should give it a go. The Economist The book is the authoritative distillation into an accessible form of a huge amount of academic research and practical experience... Professor Lo gives a masterful illustration of the problems in gauging hedge fund performance with his famous fantasy fund Capital Decimation Partners. -- Steven Bell The Business Economist For scholars already familiar with the concepts of modern portfolio theory, the book is a good start in a quest to expand their knowledge of hedge funds strategies... As one of the leading researchers in the field, Lo sets the standard by establishing key concepts for the industry with this book. -- Marcel Mollenbeck Financial Markets and Portfolio ManagementMore details
Series
Language
English
Place of publication
New Jersey
United States
Target group
Professional and scholarly
College/higher education
Product notice
Trade binding
Illustrations
39 line illus. 51 tables.
Dimensions
Height: 229 mm
Width: 152 mm
Weight
680 gr
ISBN-13
978-0-691-13294-5 (9780691132945)
Copyright in bibliographic data and cover images is held by Nielsen Book Services Limited or by the publishers or by their respective licensors: all rights reserved.
Schweitzer Classification
Other editions
New editions
Book
07/2010
Princeton University Press
€46.10
Shipment within 10-20 days
Person
Andrew W. Lo is the Harris & Harris Group Professor at the MIT Sloan School of Management, and director of the MIT Laboratory for Financial Engineering. He is the coauthor of "A Non-Random Walk Down Wall Street" and "The Econometrics of Financial Markets" (both Princeton).
Content
List of Tables xi List of Figures xvii List of Color Plates xxi Acknowledgments xxiii Chapter 1: Introduction 1 1.1 Tail Risk 7 1.2 Nonlinear Risks 13 1.3 Illiquidity and Serial Correlation 25 1.4 Literature Review 30 Chapter 2: Basic Properties of Hedge Fund Returns 34 2.1 CS/Tremont Indexes 37 2.2 Lipper TASS Data 40 2.3 Attrition Rates 43 Chapter 3: Serial Correlation, Smoothed Returns, and Illiquidity 64 3.1 An Econometric Model of Smoothed Returns 66 3.2 Implications for Performance Statistics 70 3.3 Estimation of Smoothing Profiles 75 3.4 Smoothing-Adjusted Sharpe Ratios 79 3.5 Empirical Analysis of Smoothing and Illiquidity 83 Chapter 4: Optimal Liquidity 97 4.1 Liquidity Metrics 98 4.2 Liquidity-Optimized Portfolios 105 4.3 Empirical Examples 107 4.4 Summary and Extensions 117 Chapter 5: Hedge Fund Beta Replication 121 5.1 Literature Review 123 5.2 Two Examples 124 5.3 Linear Regression Analysis 126 5.4 Linear Clones 138 5.5 Summary and Extensions 164 Chapter 6: A New Measure of Active Investment Management 168 6.1 Literature Review 170 6.2 The AP Decomposition 172 6.3 Some Analytical Examples 180 6.4 Implementing the AP Decomposition 187 6.5 An Empirical Application 191 6.6 Summary and Extensions 196 Chapter 7: Hedge Funds and Systemic Risk 198 7.1 Measuring Illiquidity Risk 200 7.2 Hedge Fund Liquidations 203 7.3 Regime-Switching Models 211 7.4 The Current Outlook 215 Chapter 8: An Integrated Hedge Fund Investment Process 217 8.1 Define Asset Classes by Strategy 221 8.2 Set Portfolio Target Expected Returns 222 8.3 Set Asset-Class Target Expected Returns and Risks 222 8.4 Estimate Asset-Class Covariance Matrix 223 8.5 Compute Minimum-Variance Asset Allocations 224 8.6 Determine Manager Allocations within Each Asset Class 225 8.7 Monitor Performance and Risk Budgets 227 8.8 The Final Specification 227 8.9 Risk Limits and Risk Capital 229 8.10 Summary and Extensions 235 Chapter 9: Practical Considerations 237 9.1 Risk Management as a Source of Alpha 237 9.2 Risk Preferences 239 9.3 Hedge Funds and the Efficient Markets Hypothesis 242 9.4 Regulating Hedge Funds 250 Chapter 10: What Happened to the Quants in August 2007? 255 10.1 Terminology 260 10.2 Anatomy of a Long/Short Equity Strategy 261 10.3 What Happened in August 2007 269 10.4 Comparing August 2007 with August 1998 273 10.5 Total Assets, Expected Returns, and Leverage 276 10.6 The Unwind Hypothesis 281 10.7 Illiquidity Exposure 284 10.8 A Network View of the Hedge Fund Industry 286 10.9 Did Quant Fail? 292 10.10 Qualifications and Extensions 298 10.11 The Current Outlook 300 Appendix 303 A.1 Lipper TASS Category Definitions 303 A.2 CS/Tremont Category Definitions 305 A.3 Matlab Loeb Function tloeb 308 A.4 GMM Estimators for the AP Decomposition 310 A.5 Constrained Optimization 312 A.6 A Contrarian Trading Strategy 313 A.7 Statistical Significance of Aggregate Autocorrelations 314 References 317 Index 331