In The Dynamics of the Hedge Fund Industry, Lo begins by describing several hedge fund features that distinguish them from traditional investments, such as their propensity to experience more extreme returns than expected from a normal distribution and their exposure to nonlinear risk factors, which leads to skewed return distributions, nonrandom return patterns, and illiquidity. He then proposes a variety of new techniques for modeling these hedge fund features.
For example, he shows how the variance ratio can be used to map high-frequency return and risk measures onto low-frequency measures, and he describes how to add a third dimension to mean–variance analysis to incorporate illiquidity.
Throughout the monograph, Lo takes care to explain the practices and other factors that give rise to the special properties of hedge funds, which helps the reader distinguish features that might reflect a random pass through history from those that we should expect to endure. He also illustrates his new techniques with applications based on actual hedge fund data. Many of his examples offer striking evidence of the superiority of his new metrics and analytical tools. And Lo presents his material in a style that is accessible and engaging without sacrificing rigor or attention to detail.
- Basic Properties of Hedge Fund Returns
- Serial Correlation, Smoothed Returns, and Illiquidity
- Optimal Liquidity
- An Integrated Hedge Fund Investment Process
- Practical Considerations