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Hedge Funds: An Analytic Perspective (Advances in Financial Engineering) | 
| Author: Andrew W. Lo
Publisher: Princeton University Press
Category: Book
List Price: $45.00
Buy New: $29.95
You Save: $15.05 (33%)
New (23) Used (7) from $29.95
Avg. Customer Rating:  2 reviews
Sales Rank: 75873
Media: Hardcover
Number Of Items: 1
Pages: 364
Shipping Weight (lbs): 1.5
Dimensions (in): 9.3 x 6.4 x 1.3
ISBN: 0691132941
Dewey Decimal Number: 332.64524
EAN: 9780691132945
ASIN: 0691132941
Publication Date: May 18, 2008
Availability: Usually ships in 1-2 business days
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Product 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.
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| Customer Reviews:
Interesting and informative August 5, 2008
5 out of 13 found this review helpful
For those readers such as this reviewer who are strong advocates of complete automation of trading in the financial markets, chapter 8 of this book should be of great interest. It gives in the author's words a tentative explanation for some of the peculiar events that were happening last year at this time in some of the "quant funds", particularly those that deployed what have been called `statistical arbitrage strategies." What is valuable about the author's discussion in this chapter is that he is honest enough to admit his explanations are tentative, and he avoids the hype of the popular and financial presses at the time. One headline in particular made the point that complex mathematical formulas "failed" Wall Street while another spoke of the "miscalculations" of Wall Street's "math brains." There is no doubt that the events of August 6-10, 2007 surprised many, including some of the managers and modelers of these quant funds, but others believe, correctly, that such large sways in losses should be viewed as part of the dynamics of the financial markets of the twenty-first century. Events like those in August 2007 will just be something traders will have to get used to, until the full automation of the financial markets can be completed, after which any anxieties will arise from those whose fortunes may be depleted from the trading strategies of the machines participating in this automation.
The author does not say much about automation in this article, except to give justified praise to those mathematicians, programmers, and managers who worked together to bring about automated trading platforms. Instead the author wants to enlighten readers who may not have in-depth knowledge of `long/short equity" strategies and their role in the events of August 2007. The mathematics is kept at a fairly elementary level, with most of the space in the chapter devoted to narrative explanations rather than mathematical formalism. The author delegates more of the mathematical details to the appendices. All of discussion in this chapter is fascinating, especially the comparisons of the August 2007 events to those in the Long Term Capital Management debacle in 1998. The latter has been used as a kind of benchmark for the modeling of extreme events in the financial markets, and how tightly coupled different sectors of these markets can be. The author alludes to this coupling in his `unwinding hypothesis', wherein the rapid unwinding of any equity portfolio can affect all other quantitative strategies (so-called "common factor exposures"). The obstruction to validating his hypothesis is the proprietary nature of hedge funds, with each one guarding their own algorithmic secrets passionately, but yet who endeavor always to "reverse engineer" the others.
It is this lack of data and the asserted entanglement between different hedge funds that causes the author to discuss a very interesting tool in the mathematical modeling of creditor and illiquidity risk in hedge funds: the mathematical theory of networks. This reviewer, who has in times past worked in network modeling for several years, finds this an exciting development, and further proof of the interdisciplinary nature of today's modeling efforts. Of course when one is modeling networks one is usually given the network topology and then endeavors to understand the information flow across the different devices (or nodes) in the network. However, when applying networks to the hedge fund industry one does not have information on the network topology due to the lack of transparency. The author of course realizes this and corrects for it by calculating the absolute values of the correlations between the hedge fund indexes over time. This gives him a notion of the "degree of connectedness" in the hedge fund industry, and he gives some (pictorial) examples. Simulations using artificially generated data from Monte Carlo simulations may be of assistance here in studying the degree of connectedness, in lieu of real data from the hedge funds themselves (which may not be farfetched given the regulatory threats hedge funds now face).
Since the author is heavily involved in the analysis of hedge funds it is natural to expect him to devote some space in the book to addressing the question as to whether the quant funds did indeed fail. In this regard he views the events of August 2007 as reflecting the liquidation of portfolios that were constructed using quantitative methods. The strength of quantitative methods remains to be tested, and also successful risk strategies must be devised that reflect the large deviation events that might occur in hedge funds.
Note: This review is based solely on a reading of chapter 8 of the book.
real analysis on hedge funds - no fluff June 23, 2008
7 out of 14 found this review helpful
This is a thorough analysis of a number of different hedge fund strategies and a preview of the topics likely to be heavily discussed by hedge fund managers, pension plans as they move into the space, consultants advising plans, and fund of funds players.
Puts alot of meat on the bones of many issues those in the hedge fund business are currently discussing and grappling with in order to refine their business processes.
Very well researched and well written. Good analysis of the debacle of quant funds in 2007.
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