"Indexes are becoming more than just market-cap-weighted portfolios, according to a new report from MIT. With new passive investment products continuing to emerge, Sloan Professor of Finance Andrew Lo proposed broadening the definition of an index to include “dynamic indexes” such as smart beta strategies..."
"The investment industry should be constantly looking at the impact of technology on the status quo. Just because indexes have been defined as cap-weighted portfolios, doesn’t mean that can’t change. In fact, the evolution in portfolio management necessitates a change in thinking with regard to the definition of indexes, in particular so risk management can be decoupled from alpha generation. In a new paper that argues for a new definition of what constitutes an index, Andrew Lo, professor of finance at MIT Sloan School of Management pushes the boundaries by not only suggesting change, but by demonstrating a new functional definition for indexes and the benefits, and pitfalls, of doing so..."
"Andrew Lo, professor of finance at the MIT Sloan School of business and money manager (AlphaSimplex), believes that Wall Street-style financial engineering can hasten cures for cancer and other diseases while providing healthy returns to investors.
"During an MIT Sloan webcast on Thursday, Lo said that preliminary research conducted by him and his colleagues indicated that a “mega” primary research-focused fund could produce returns to bondholders of 5% to 8%, while equity shareholders could expect returns ranging from 8% to 12%. An investment fund with interests in perhaps hundreds of research projects could also provide investors with returns not correlated to the S&P 500..."
MIT prof: To cure cancer, we need pension funds as much as VC firms
Boston Business Journal
"Forget venture capital firms investing in promising biotech startups. If we really want to cure cancer, we need pension funds and insurers putting billions of dollars into a fund made up of hundreds of research projects, according to an MIT professor.
"Since 2012, Andrew Lo, a finance professor at MIT’s Sloan School of Management, has been proposing that financiers create a $30 billion “megafund” that invests in early-stage cancer research and development..."
A decade later, former YIO intern now manages billions
Yale Daily News
In a New York Times profile published last Thursday, former Yale Investments Office analyst Zhang Lei GRD ’02 SOM ’02 chronicled his journey from interning under Swensen to managing one of the world’s most successful firms, Hillhouse Capital Group. The firm, which Zhang founded in 2005, now controls over $18 billion... MIT Finance professor Andrew Lo ’80 said that leveraging the skills and investment knowledge present in the alumni community is not a new phenomenon. “I think it is an advantage because alumni are quite loyal to the university so they have additional motivation for participating in supporting the endowment activity,” Lo said. “We have seen this not only at Yale, but at other universities as well, where if you look at the investment committee of endowments, they are populated with alumni who are talented in the investment industry and are willing to give their services and expertise.”
“Smart beta” funds are trying to outsmart your active manager. But individual investors who are drawn to them should also make sure they don’t get outsmarted themselves... “Smart beta is often accompanied by dumb sigma,” [Professor Andrew Lo] says, meaning additional risk that is unnecessary and which investors may not be rewarded for. “When you have multiple sources of beta, you also have multiple sources of risk. Illiquidity risk, for example, can often be a companion to smart beta.”
Is there a next Jack Bogle? Not if you ask Jack Bogle
Freezing rain is falling on the sidewalks at Vanguard Group’s sprawling suburban campus outside Philadelphia, but it doesn’t slow down company founder John C. “Jack” Bogle as he hustles from his office to the cafeteria for lunch. A slew of money managers and academics—Robert Arnott of Research Affiliates, for example, and Andrew Lo at AlphaSimplexGroup—say they’re building on what Bogle created.
The dodo, shifting conditions and investor survival
When trying to understand how the market is working, we should think not only of bulls and bears, but also of dodos. Our aversion to risk comes from the deep biological imperatives that have allowed humans to avoid extinction. Any theory of markets must take account of this.
That, at least, is the radical prognosis of Andrew Lo, of the MIT Sloan school of business, who has for years worked on an ambitious project to apply biology to finance. His latest paper, published with several colleagues, provides mathematical equations to show how risk-averse behaviour is necessary for survival. That means that investors in markets will take risk-averse actions rather than the purely rational decisions that economists have classically assumed.
Natixis and MIT team up to build individual benchmarks based on investor behavior. Dr. Andrew Lo, Charles E. and Susan T. Harris Professor at the MIT Sloan School of Management and director of the Laboratory for Financial Engineering (LFE), will lead the project, which will be conducted using Natixis data (the firm has collected several years worth of data that track the behavior of individual investors, financial advisors and institutional investors, and that is based on responses to more than 500 survey questions by more than 30,000 participants). The main goal of the project is to create personal, individual benchmarks that take into account individual behaviors in order to improve investor participation and performance.
Upside: ‘Alternative’ Funds: Are They Really Better Than Bonds?
The Wall Street Journal
With rising interest rates hurting bond prices, investors and financial advisers are scrambling for other options to provide stability to their portfolios. Some of them have turned to "alternative" funds, many of which claim to offer bond-like stability without exposure to interest-rate rises. Alternative funds use hedge-fund-like strategies to try to capture returns that aren't tied to broad markets. Some funds use options to limit their market exposure, for example, or place bets that certain stocks will drop in value. Professor Andrew Lo comments on the use of alternative funds.
Finance Genius Andrew Lo Explains How The World’s Biggest Problem Can Be Fixed With Financial Engineering
In a question and answer with Business Insider's Rob Wile, Professor Lo speaks about the state of the markets, why investing must now be treated like exercise, and what we can expect from his latest work.
Andrew Lo, a professor at MIT Sloan School of Management and investigator at MIT’s Computer Science and Artificial Intelligence Lab, has been seeking to find out why so many bad decisions were made on Wall Street leading up to the financial crisis. Lo, along with Thomas J. Brennan, a law professor at Northwestern, says the evolution of the human mind may explain a blind faith that housing values will rise and that mortgage securities and stocks would not fall in value as well as the opposite view.
Dr. Andrew Lo: ‘Buy and Hold’ Does Not Work Anymore
The MIT/Sloan School of Management professor and Director of MIT’s Laboratory for Financial Engineering has been widely quoted on the implications of the 2008 financial crisis. One theme that Dr. Lo emphasizes repeatedly is that the risks associated with different asset classes can vary dramatically over time and for this reason, risk must be tracked, forecasted and budgeted.