Risk measurement and investment myopia in hedge fund management

Lo (2001) surveys the literature on risk management for hedge funds, and recommends a dynamic and transparent risk measurement for the evolutionary hedge fund industry by citing Albert Einstein's comments. This study is to explore the feasibility and advantages of adopting a dynamic absolute-deviation risk measurement in hedge fund management. It does not only provide an optimal asset allocation strategy both analytically and numerically in a dynamic mean-absolute deviation (DMAD) setting for hedge fund managers, but also contributes to mitigation of potential investment myopia problems in their risktaking behaviors. It sheds light on risk management and investor-fund manager agency conflicts in the hedge fund industry and adds to the literature on portfolio selection and optimal asset allocation.