Dr. Andrew Lo, Professor at Massachusetts Institute of Technology and founder of investment manager AlphaSimplex Group LLC, not only studies quantitative risk management methods, but he also actively employs them. According to the New York Times, Dr. Lo wants to show the world that his academic theories and computations can translate into investor profits by managing the Natixis ASG Global Alternatives mutual fund. His strategy seems to be working. With the fund up 0.19 percent since inception last September relative to the 20% decline in the S&P, it is fair to say it did a good job of weathering the economic crisis.
Using forwards and futures, Dr. Lo believes he can diversify client holdings using a unique solution to what he calls “hedge fund beta replication.” The strategy aims to capture the average risk and return of a diversified portfolio of hedge funds using complex computer algorithms and statistics. The main goal is to provide a hedge fund-like investment vehicle for average investors.
Dr. Lo has made sure to avoid any potential mistakes prior academics turned hedge fund managers have made, such as the Myron-Scholes options strategy that effectively sunk Long Term Capital Management. “Our risk management came out of the [Long Term Capital Management] incident,” claims Dr. Lo. He has also established checks and balances in order to help prevent excessive risk taking by allowing the Chief Compliance and Risk Officers to overrule any questionable investment. The fund’s exposure to volatility is also mitigated by algorithm rebalancing.
The fund may have survived the worst of the crisis, but it will be interesting to see whether or not the ASG Global Alternatives Fund can capture significant upside and provide an absolute return in both a fair and foul market climate.
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