Advances in Financial Engineering

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). 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. In a new chapter, he looks at how the strategies for and regulation of hedge funds have changed in the aftermath of the financial crisis. "Andrew Lo is a major figure in finance so his new book on the fast-moving world of hedge funds ought to be in the 'must read' category. . . . 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 "Anyone who is considering investing in hedge funds, or is involved in regulating the financial-services industry, should give it a go." "Finally a serious book on hedge funds based on real data, written by a leading financial economist."---Tyler Cowen, Marginal Revolution "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 Möllenbeck, Financial Markets and Portfolio Management "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