Über die Autorin bzw. den Autor

Andrew W. Lo

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"Andrew Lo's Hedge Funds is likely to be the high-water mark in the analysis of hedge funds for years to come. Focusing on hedge fund returns and trading strategies, risk characteristics, and potential for illiquidity, Lo brings to bear his always fresh and insightful thinking."--Richard Bookstaber, author of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

"Lo offers a truly unique perspective. He examines the properties of returns and illiquidity in great detail and introduces an innovative concept of mean-variance-liquidity optimization, something that no other book on hedge funds has addressed."--Narayan Y. Naik, London Business School

"This book provides a useful and very timely overview of key aspects of the hedge fund industry. It summarizes the basic properties of hedge fund returns, discusses why traditional performance measures may be misleading when analyzing hedge fund performance, and highlights important issues such as serial correlation, return smoothing, and illiquidity."--Markus K. Brunnermeier, Princeton University

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HEDGEFUNDS

PRINCETON UNIVERSITY PRESS

Contents

List of Tables.................................................................xiList of Figures................................................................xviiList of Color Plates...........................................................xxiAcknowledgments................................................................xxiii1 Introduction.................................................................11.1 Tail Risk..................................................................71.2 Nonlinear Risks............................................................131.3 Illiquidity and Serial Correlation.........................................251.4 Literature Review..........................................................302 Basic Properties of Hedge Fund Returns.......................................342.1 CS/Tremont Indexes.........................................................372.2 Lipper TASS Data...........................................................402.3 Attrition Rates............................................................433 Serial Correlation, Smoothed Returns, and Illiquidity........................643.1 An Econometric Model of Smoothed Returns...................................663.2 Implications for Performance Statistics....................................703.3 Estimation of Smoothing Profiles...........................................753.4 Smoothing-Adjusted Sharpe Ratios...........................................793.5 Empirical Analysis of Smoothing and Illiquidity............................834 Optimal Liquidity............................................................974.1 Liquidity Metrics..........................................................984.2 Liquidity-Optimized Portfolios.............................................1054.3 Empirical Examples.........................................................1074.4 Summary and Extensions.....................................................1175 Hedge Fund Beta Replication..................................................1215.1 Literature Review..........................................................1235.2 Two Examples...............................................................1245.3 Linear Regression Analysis.................................................1265.4 Linear Clones..............................................................1385.5 Summary and Extensions.....................................................1646 A New Measure of Active Investment Management................................1686.1 Literature Review..........................................................1706.2 The AP Decomposition.......................................................1726.3 Some Analytical Examples...................................................1816.4 Implementing the AP Decomposition..........................................1866.5 An Empirical Application...................................................1936.6 Summary and Extensions.....................................................1977 Hedge Funds and Systemic Risk................................................1987.1 Measuring Illiquidity Risk.................................................2007.2 Hedge Fund Liquidations....................................................2037.3 Regime-Switching Models....................................................2117.4 The Current Outlook........................................................2158 An Integrated Hedge Fund Investment Process..................................2178.1 Define Asset Classes by Strategy...........................................2218.2 Set Portfolio Target Expected Returns......................................2228.3 Set Asset-Class Target Expected Returns and Risks..........................2228.4 Estimate Asset-Class Covariance Matrix.....................................2238.5 Compute Minimum-Variance Asset Allocations.................................2248.6 Determine Manager Allocations within Each Asset Class......................2258.7 Monitor Performance and Risk Budgets.......................................2278.8 The Final Specification....................................................2278.9 Risk Limits and Risk Capital...............................................2298.10 Summary and Extensions....................................................2359 Practical Considerations.....................................................2379.1 Risk Management as a Source of Alpha.......................................2379.2 Risk Preferences...........................................................2399.3 Hedge Funds and the Efficient Markets Hypothesis...........................2429.4 Regulating Hedge Funds.....................................................25010 What Happened to the Quants in August 2007?.................................25510.1 Terminology...............................................................26010.2 Anatomy of a Long/Short Equity Strategy...................................26110.3 What Happened in August 2007?.............................................26910.4 Comparing August 2007 with August 1998....................................27310.5 Total Assets, Expected Returns, and Leverage..............................27610.6 The Unwind Hypothesis.....................................................28110.7 Illiquidity Exposure......................................................28410.8 A Network View of the Hedge Fund Industry.................................28610.9 Did Quant Fail?...........................................................29210.10 Qualifications and Extensions............................................29810.11 The Current Outlook......................................................30011 Jumping the Gates...........................................................30311.1 Linear Risk Models........................................................30511.2 Beta Overlays.............................................................30811.3 Hedging Long/Short Equity Managers........................................31011.4 Dynamic Implementations of Beta Overlays..................................31711.5 Conclusion................................................................319Appendix.......................................................................323A.1 Lipper TASS Category Definitions...........................................323A.2 CS/Tremont Category Definitions............................................325A.3 Matlab Loeb Function tloeb.................................................328A.4 GMM Estimators for the AP Decomposition....................................330A.5 Constrained Optimization...................................................332A.6 A Contrarian Trading Strategy..............................................333A.7 Statistical Significance of Aggregate Autocorrelations.....................334A.8 Beta-Blocker and Beta-Repositioning Strategies.............................335A.9 Tracking Error.............................................................339References.....................................................................341Index..........................................................................355

Chapter One

One of the fastest growing sectors of the financial services industry is the hedge fund or alternative-investments sector, currently estimated at more than $1 trillion in assets...