Academics test drive at hedge funds

Yale University professor Roger Ibbotson

The growing and lightly regulated hedge fund industry is attracting new players — business school professors eager to test their theories in a field known for big risks and occasionally bigger rewards.

Hedge funds are becoming a tempting tool for faculty members looking to sharpen research and giving a Wall Street perspective to their students, all while making some extra money. Economic consultant Peter Bernstein reportedly said the link between academic theory and Wall Street is not new, but the interest among professors to run a hedge fund is.

While hedge funds frequently outperform more traditional investments, some have failed spectacularly. Last year, Connecticut-based Amaranth Advisors wrongly guessed that tropical storms in the Gulf of Mexico would cause natural gas prices to spike. The storms didn't develop and Amarath lost billions within a week, prompting lawsuits and congressional hearings. So did several others that chased subprime debt.

Does this enthusiasm to test drive academic theory explain why there are more busts than booms in hedge fund domain? Why does the expression “up by the stairs and down in the lift” come to my mind?

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