We use a new dataset of hedge fund returns from a separate account platform to examine (1) how much of hedge fund return smoothing is due to main-fund specific factors, such as managerial reporting discretion (2) the costs of removing hedge fund share restrictions. These accounts trade pari passu with matching hedge funds but feature third-party reporting and permissive share restrictions. We use these properties to estimate that 33% of reported smoothing is due to managerial reporting methods. The platform's fund-level liquidity is associated with costs of 1.7% annually. Investor flows chase monthly past performance on the platform but not in the associated funds.

Andrew Lo discusses the tension between statistical significance (p-values) and patient values in medical research. Based on his research, he proposes a Bayesian decision analysis framework for making regulatory decisions that reflects differences in both the impact of diseases and stakeholder perspectives in a systematic, objective, transparent and repeatable manner.

During a half-hour interval on May 6, 2010, stock prices for some of the largest companies in the world dropped precipitously, some to just pennies a share. Then, just as suddenly and inexplicably, shares recovered to their pre-crash prices. This unprecedented event, burned into the memories of investors and regulators alike, is now known as the Flash Crash. Since that day, financial markets have seen flash crashes in US Treasury securities, foreign currencies, and exchange-traded funds (ETFs). Other puzzling, system-wide glitches are becoming more frequent as well. Without a doubt, our financial systems are complex and often unpredictable, and when they swing out of control they remind us how much we still have to learn about how they work and how inadequate our traditional methods of controlling them are.

In response to the senators January 21, 2016 request for comment on their Sovaldi report, February 27, 2016. On behalf of all patients and their family members and friends, thank you for conducting the study on the pricing strategy of Gilead Sciences and shining a spotlight on the issue of drug pricing. When access to life-saving therapies is limited by affordability, important moral and ethical issues must be considered in addition to economic and political ones. For too long, we in the United States have ignored these issues for fear of “death panels” and difficult end-of-life decisions. But the growing number of breakthrough therapies and the rising cost of healthcare will soon force us to confront these issues directly. Your report and is an important step in helping us to develop a rational, ethical approach to dealing with this looming challenge.

The authors introduce a new approach to identifying and monitoring systemic risk that combines network analysis and tail risk contribution (TRC). Network analysis provides great flexibility in representing and exploring linkages between institutions, but it can be overly general in describing the risk exposures of one entity to another. TRC provides a more focused view of key systemic risks and richer financial intuition, but it may miss important linkages between financial institutions. Integrating these two methods can provide information on key relationships between institutions that may become relevant during periods of systemic stress. The authors demonstrate this approach using the exposures of money market funds to major financial institutions during July 2011. The results for their example suggest that TRC networks can highlight both institutions and funds that may become distressed during a financial crisis.

Americans are increasingly apprehensive about our future, so it is inspiring when Congress produces legislation intended to both enhance our health and expand our economy. The 21st Century Cures Act, recently passed by the House with an impressive bipartisan majority vote of 344 to 77, intends to accelerate the many-step process of drug discovery and development, from basic scientific research to clinical development to delivery, distribution, and ongoing monitoring. Among other things, the legislation boosts National Institute of Health funding, dramatically speeds up the US Food and Drug Administration (FDA) approval process, and aims to make use of new information technology to better monitor the performance of medical products after they reach the market. This landmark bill now awaits a comparable piece of legislation being developed by the Senate Health Education, Labor, and Pensions Committee. Together, they will transform the biomedical ecosystem and provide the foundation for the next several decades of innovative life-saving and health-enhancing solutions for our nation and the world.

The reports by Wim van Harten and colleagues and Sabine Vogler and colleagues in The Lancet Oncology on the costs of cancer drugs in European countries deserve special attention from all oncology and biopharmaceutical stakeholders. van Harten identified that, in 15 European countries, list prices can be up to 92% lower than the highest reported, with actual prices paid up to 58% lower. These findings are backed up by Vogler and colleagues' study in 16 European countries, Australia, and New Zealand, which documented that highest-minus-lowest list price differences ranged from 28% to 388% for cancer drugs. Such variability argues strongly for greater transparency in drug pricing and the circumstances leading to such differences. But most importantly, it underscores the need to establish the true value of cancer therapies, and those who have championed this cause have been handed unequivocal evidence confirming what they have long suspected: drug prices are typically driven by what the market will bear.

With the rise of social media, investors have a new tool for measuring sentiment in real time. However, the nature of these data sources raises serious questions about its quality. Because anyone on social media can participate in a conversation about markets—whether the individual is informed or not—these data may have very little information about future asset prices. In this article, the authors show that this is not the case. They analyze a recurring event that has a high impact on asset prices—Federal Open Market Committee (FOMC) meetings—and exploit a new dataset of tweets referencing the Federal Reserve. The authors show that the content of tweets can be used to predict future returns, even after controlling for common asset pricing factors. To gauge the economic magnitude of these predictions, the authors construct a simple hypothetical trading strategy based on this data. They find that a tweet-based asset allocation strategy outperforms several benchmarks—including a strategy that buys and holds a market index, as well as a comparable dynamic asset allocation strategy that does not use Twitter information.

Duchenne muscular dystrophy (DMD) is a rare genetic disorder affecting thousands of individuals, mainly young males, worldwide. Currently, the disease has no cure, and is fatal in all cases. Advances in our understanding of the disease and innovations in basic science have recently allowed biotechnology companies to pursue promising treatment candidates for the disease, but so far, only one drug with limited application has achieved FDA approval. In this case study, we profile the work of an early-stage life sciences company, Solid Biosciences, founded by a father of a young boy with DMD. In particular, we discuss Solid’s one-disease focus and its strategy to treat the disease with a diversified portfolio of approaches. The company is currently building a product pipeline consisting of genetic interventions, small molecules and biologics, and assistive devices, each aimed at addressing a different aspect of DMD. We highlight the potential for Solid’s business model and portfolio to achieve breakthrough treatments for the DMD patient community.

Moderator Martin Leibowitz asked a panel of industry experts—Andrew W. Lo, Robert C. Merton, Stephen A. Ross, and Jeremy Siegel—what they saw as the most important issues in finance, especially as those issues relate to practitioners. Drawing on their vast knowledge, these panelists addressed topics such as regulation, technology, and financing society’s challenges; opacity and trust; the social value of finance; and future expected returns.

WSJ Wealth Expert Andrew W. Lo of MIT says robo advisers are the rotary phones to today’s iPhone--technology that has great potential but it still immature.

Economic shocks can have diverse effects on financial market dynamics at different time horizons, yet traditional portfolio management tools do not distinguish between short- and long-term components in alpha, beta, and covariance estimators. In this paper, we apply spectral analysis techniques to quantify stock-return dynamics across multiple time horizons.Using the Fourier transform, we decompose asset-return variances, correlations, alphas, and betas into distinct frequency components. These decompositions allow us to identify the relative importance of specific time horizons in determining each of these quantities, as well as to construct mean-variance-frequency optimal portfolios. Our approach can be applied to any portfolio, and is particularly useful for comparing the forecast power of multiple investment strategies. We provide several numerical and empirical examples to illustrate the practical relevance of these techniques.

A crisis is building over the prices of new transformative therapies for cancer, hepatitis C virus infection, and rare diseases. The clinical imperative is to offer these therapies as broadly and rapidly as possible. We propose a practical way to increase drug affordability through health care loans (HCLs)—the equivalent of mortgages for large health care expenses. HCLs allow patients in both multipayer and single-payer markets to access a broader set of therapeutics, including expensive short-duration treatments that are curative. HCLs also link payment to clinical benefit and should help lower per-patient cost while incentivizing the development of transformative therapies rather than those that offer small incremental advances. Moreover, we propose the use of securitization—a well-known financial engineering method—to finance a large diversified pool of HCLs through both debt and equity. Numerical simulations suggest that securitization is viable for a wide range of economic environments and cost parameters, allowing a much broader patient population to access transformative therapies while also aligning the interests of patients, payers, and the pharmaceutical industry.

Opinion Editorial

"A new class of medications was recently approved that cures more than 95 percent of people with Hepatitis C in only six weeks at a cost of about $84,000 per person, and new therapies with price tags that are likely to exceed $1 million per person are now available or coming soon. How can patients possibly afford them?

"In an article published in the journal Science Translation Medicine, we outline a feasible market-based solution that could immediately expand access to transformative medications, including cures for Hepatitis C and cancer. The basic concept is to convert a large upfront medical expense into a series of more affordable payments, akin to getting a mortgage when buying a house. The challenge of curative medications that only require a short course of therapy is that the whole price is paid upfront — how many homeowners could buy their houses using only cash? Instead, most home buyers get a mortgage and make monthly payments for as long as they benefit from owning the house or until the full amount is paid. We propose the same solution to overcome the liquidity problem that prevents access to curative medications, which we call “health care loans,” or HCLs..."

We extend the megafund concept for funding drug discovery to enable dynamic leverage in which the portfolio of candidate therapeutic assets is predominantly financed initially by equity, and debt is introduced gradually as assets mature and begin generating cash flows. Leverage is adjusted so as to maintain an approximately constant level of default risk throughout the life of the fund. Numerical simulations show that applying dynamic leverage to a small portfolio of orphan drug candidates can boost the return on equity almost twofold compared with securitization with a static capital structure. Dynamic leverage can also add significant value to comparable all-equity-financed portfolios, enhancing the return on equity without jeopardizing debt performance or increasing risk to equity investors.