Longer version: The NY Times looks at one of the biggest names in academic finance Dr. Andrew Lo of MIT.
A New Fund From an M.I.T. Professor - NYTimes.com:
"Dr. Lo and his staff use futures and forward contracts to invest in the stock, bond, commodity and currency markets.Lo described the need for the fund:
His move into money management and mutual funds isn’t without risks....Plenty of professors have flopped on Wall Street, calling into question whether their theories amounted to more than elegant math. Two Nobel laureates worked with Long-Term Capital Management, which nearly collapsed in 1998....And many mutual funds in general, despite their potential on paper, fail to deliver market-beating returns.
From September through June, Dr. Lo’s fund...returned 0.19 percent, versus a 20 percent decline in the Standard & Poor’s 500. The fund’s expense ratio was 1.62 percent, versus an average of 2.10 percent for comparable offerings tracked by Morningstar.
“Investors...have suffered from diversification-deficit disorder,.....They think they’re getting diversification from putting their money in large- and small-cap stocks, value and growth strategies and international and emerging markets. But the fact is that all of those went down last year.”
His prescription ...hedge fund beta replication....Mathematical models discern the common bets that hedge funds have made — their betas, in technical terms. AlphaSimplex uses futures and forwards to replicate these betas. By design, the method aims to capture the average risk and return of a diversified portfolio of hedge funds.
The whole article is here.