Doing a little ET search on Prof. Lo may help putting things a bit more into perspective. I never found much useful connection between the academic lore and the sobering art of succesful market speculation.
Ah, there's the payoff. No wonder the NYT is pushing this. One might wonder why a rocket scientist and hedge fund guy like this wouldn't apply some of that financial engineering expertise to hedging the risk of fund failures or the risk of illiquidity of their portfolio products. He makes it sound like he's in possession of enough intelligence to devise a little index. I'll bet I know of at least one exchange that would list it. Seems like it would be a very hot product these days, with plenty of interested parties willing to buy the protection. We've been around this block before, and that's what markets do -- respond to risk. But then, I guess that won't get you printed up in the NYT, what with its interest in flogging potential catastrophes.
"The nightmare script for Mr. Lo would be a series of collapses of highly leveraged hedge funds that bring down the major banks or brokerage firms that lend to them." I think he makes a good point. Especially when you have a trillion dollars slushing around in hedge funds run by rum-dumb, half-baked PhD quants seeking profits backed by big banks whose financial analysts know less than them about market risks and trading. The combo spells bad mojo.
WTF is this guy talking about, maybe he's short and he's pissed the market been ripping him a new one for months. 7/7, Katrina didn't make the trick so he's now trying to create panic.. LOL if he thinks a "storm is brewing" then he should position his fund accordingly and avoid talking to the media. if a lot of hedge funds blow up so what? idiots always lose their money blow up or not. bubbles and crisis are caused by human greed and stupidity and no law or government institution can change human nature. besides, the US hedge fund industry is already heavily regulated. only a moron would ask for more regulation. his motives are irrelevant but i wonder what they would be? pitching his fund? he's just an attention whore? or trying to use the government for a backdoor into other fund's portfolios. only a moron or someone with ulterior motives would ask for more hedge fund regulation.
you bring up good points, buzzy2. Lo may just be making a desperate plea for more financial monitoring of risks by other managers who run hedge funds. or maybe he is just desperate. common sense would say to do what you indicate. who gives a flying fck if 1/2 the world's money blows up as long as one is well-positioned to take advantage of it. that's a trader's job (to take advantage, not to blow it up ). though, as you say, should this blow up / melt down occur (that it will eventually due to the reasons you mentioned) Lo can always get global recognition as the one who "warned" everyone. that's gotta be worth another billion pouring into his fund. It takes high drama for hedge funds to collect money.
I know a way to get great returns with no risk, I am starting a hedge fund that invests in me. With a modest investment of a few mill you will get weekly (not quarterly) returns of grateful phone calls.
You guys know so much about hedge funds, that you can summarily dismiss this guy's idea without even trying to read his paper. The news article, as usual, is a garbled interpretation of his idea and not surprisingly, doesn't really make much sense to people who knows something about trading. I think he is onto something here. Put it plainly, he rediscovered the volatility BO in the performance of hedge funds. Since a mediocre fund rarely accelerate to the upside, more often than not, such BO in a fund means a breakdown. Read through the garbled article you can see that two technical signals proceed a breakdown: 1. slowing returns in the recent past; 2. ultrasmooth performance. This makes sense. At the end of the day, he provides one insight (smooth performance does not equal to lower risk) and one observation (the two signals proceeding a breakdown have been given for the industry in the past few months). Of course, he didn't really do a backtest of these signals but only provided anecdotal evidences. But it was an academic paper so maybe they have a different standard there. I don't understand why you guys/gals are so dismissive. I guess you all know a lot more than I do.
It's not the paper, it's what he wants to do with it.... he wants more regulation... What you call "insight" is so common sense it takes a big dose of arrogance to call it "original research". There are people out there that have been predicting the slowdown in returns of the HF industry years before it happened. It's just common sense. To call yourself a scientist you have to do better than common sense. The industry is in the late stages of a bubble, the markets can only accomodate so many outperforming funds. A purge is long overdue. I don't need some hotshot professor to tell me this. He has to do better than that to impress me. If he tells me the crash will happen month X year Y I will be impressed then. Disaster prognosticators are a dime a dozen. A broken clock is right twice a day.