Cyril Connolly, the English literary critic, once suggested, "Whom the gods wish to destroy they first call promising."
In the world of institutional investing, that caveat might fit Andrew W. Lo, the brilliant academic who took a leave as professor of finance and director of the Laboratory for Financial Engineering at the Massachusetts Institute of Technology, Cambridge, to develop a money management group. Mr. Lo, hailed as a rising star in finance, is entering the money management field to run a hedge fund for Paloma Partners Management LLC.
Promising, Mr. Lo certainly is; but there will be plenty of forces, especially the "god" of the unpredictability of the capital markets, out to "destroy" him.
Academics have been regarded as more detached than the typical money manager from the pressures, biases and greed (or to put it more nicely, self-interest) of investment management. They have been prized for the fresh ideas they could bring to investing, all supported by that invaluable cache called academic research. But academic talent is no guarantee of success, as witnessed by the demise of Long-Term Capital Management LLC, noted for its Nobel economic laureates, Myron S. Scholes and Robert C. Merton.
Their failed enterprise, fortunately, hasn't tainted Wall Street's desire for good ideas from academics. One of the most recent is Richard H. Thaler, professor of behavior science and economics and director of the Center for Decision Research at the Graduate School of Business, University of Chicago. Mr. Thaler, principal of a San Mateo, Calif., investment adviser, which was renamed Fuller & Thaler Asset Management Inc., so far has successfully straddled the academic and practitioner worlds.
Mr. Lo has plenty of new ideas. But he and his backer, Paloma Partners, and its chairman, S. Donald Sussman, will have to face temptations that confront most people in money management and often bring their ruin. Messrs. Lo and Sussman in responses to concerns have addressed many of the issues.
* Failure to give enough time for a strategy to work. Mr. Sussman promises to give Mr. Lo and the team he assembled as AlphaSimplex Group LLC a long leash. "I'm a very patient man," the Paloma chairman said.
* The allure of adding more clients and money to manage risks diluting investment ideas. The two expect to limit the new hedge fund to $400 million to $500 million. If the strategy proves popular, only the self-control of the principals in increasing their lucrative business will restrain them from finding new "capacity."
* The attractions of money management power and profits may keep Mr. Lo from returning to academia, fount of his ideas, and diminish his ability to produce fresh research. But Mr. Lo plans to return to working in academia. "I believe having a strong research base is the goose that lays the golden egg," he said.
* The lure and danger of spreading oneself too thin. Aside from the hedge fund, Mr. Lo and his group are already working on a joint project with Deutsche Asset Management Inc. on global asset allocation.
Only time can judge the success of Mr. Lo and AlphaSimplex, whose principals include A. Craig MacKinlay, finance professor at the Wharton School, University of Pennsylvania.
Institutional investors should keep in mind that no matter how well the hedge fund performs it will run a relatively small amount of money. That may temper any overenthusiasm by either the principals or prospective clients.