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Hedgefunds. An analytic perspective.

2009-02-27

“...risk has become ‘endogenous’ in certain markets - particularly those that have recently become flush with large inflows of assets - which is one of the reasons that the largest players can no longer assume that historical estimates of volatility and price impact are accurate measures of risk exposure”, concludes Andrew W. Lo in August 2007 as one result of his research program, carried out for almost ten years and condensed in his book “Hedgefunds. An analytic perspective.” [Princeton, NJ: Princeton University Press (2008; Zbl 1151.91003 )].

Zentralblatt reviewer Johannes W. Nieuwenhuis judges the book as “highly interesting... The author's style is great.” The book is distinguished by “ a lot of data and empirical analysis”. The latter may also make a difference to some oversimplified theoretical models which failed to give a sufficient estimation of risk and helped to cause the current financial crisis. The following quote of the author sounds somewhat prophetical:

“Now if many funds face the same ‘death spiral’ at a given point in time (i.e. if they become more highly correlated during times of distress) and if those funds are obligors of the small number of major financial institutions, then a market event like that of August 1998 can cascade quickly into a global financial crisis. This is systemic risk ”.


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