INVESTOR PROFILE-Lo's lab offers lessons for investors
LONDON, July 8 (Reuters) - Hedge fund manager Andrew Lo has spent the better part of his career applying complex financial theory to the real world but, coming from a family of scientists, says he was the black sheep for choosing economics.
The acorn didn't fall too far from the tree, however.
After moving from Taiwan to New York when he was five, Lo did poorly at elementary school due to mild dyslexia, but blossomed when his third grade teacher made him class scientist.
His first experiments included making a battery out of a lemon, but now, as chief scientific officer at his hedge fund company AlphaSimplex, he is trying to build fixes for some of the world's biggest investment problems.
"Academia generally isn't interested in application, and business isn't really interested in theory," he says. "But we try to apply our ideas to develop products. Having a great idea is a wonderful experience, but seeing it implemented is a rush."
After graduating with a PhD in economics from Harvard in 1984, Lo combined a career in academia with consulting projects for a number of Wall Street firms, helping them develop their proprietary investment products and trading technologies.
AlphaSimplex, the firm he founded in 1999, was acquired by Natixis Global Asset Management (CNAT.PA) in 2007.
The 49-year-old argues that there has been a seismic shift in investment in the last few years, and the old-school adages about diversification that have been handed down by academics to investors no longer hold water.
HEDGE REPUBLIC
To address this, Lo is taking hedge fund techniques to the masses through his hedge fund beta replication products. Sold to retail investors via the Natixis platform, these seek to capture common risk factors or "betas" of a broad group of hedge funds.
The aim is to provide the diversification benefits of hedge funds, but more cheaply, and with greater liquidity and transparency.
Lo -- tenured at Massachusetts Institute of Technology, where he is finance professor at the Sloan School of Management and director of the Laboratory for Financial Engineering -- is also working on active volatility management, to develop a kind of "cruise control" for portfolios.
Investors have typically controlled risk in their portfolios by allocating between stocks and bonds, depending on their age, investment timeframe and risk appetite. But in the last 10 years, stocks and bonds have become more correlated.
"That mechanism for controlling risk is just not sufficient," Lo told Reuters. Continued...
