MIT economist pitches cancer megafund
Andrew W. Lo, the MIT finance professor and hedge fund manager, wants to bring Wall Street-style financial engineering to a crucial social need: curing cancer.
Named this year as one of Time magazine's 100 most influential people in the world, Lo runs an investment firm in Cambridge called AlphaSimplex Group, with $3 billion in assets. He is known for his "adaptive markets" financial theory, which maintains that prices and investors are not always rational.
Now he is proposing an idea that would go beyond his own firm, creating a "megafund" that would flood early-stage research in cancer drugs with $30 billion. By supporting as many as 150 experimental compounds at any one time and bringing in large numbers of investors, he argues, the risk would be spread over a much larger base.
Even if just a few of the treatments prove effective, Lo estimates the fund would be profitable, earning equity investors annual returns of 7 to 10 percent.
"Only with massive scale can you reduce the risk of this early-stage research,'' said Lo, who pitched his megafund idea in a paper published Sunday in the journal Nature Biotechnology.
"Finance is a means to an end. It's a way to allow us to collaborate on problems of unprecedented scale," he said.
Typically research on cancer cures — already now into the billions of dollars — is funded by the government and private companies. But it's a high-risk proposition. It takes about $200 million just to get a new medicine to the point it can be tested in humans, Lo said. Even then, most trials end with disappointing results.
Only about half of the treatments that make it to final testing are submitted to the Food and Drug Administration for approval, said Kenneth I. Kaitin, director of the Tufts Center for the Study of Drug Development in Boston. Getting to that point takes about 8½ years, he said.
"Promising research that could potentially lead to new products is not being pursued, simply because of a lack of funding,'' said Kaitin, who thinks Lo's idea could be effective.
Lo is not planning to run the new fund, though he is looking to help build a team to manage it.
His own performance has in some periods beaten a hedge fund index but has often trailed the broader market. So far this year, his ASG Global Alternatives Fund is up 2.5 percent, while the Standard & Poor's 500 stock index has gained 16.4 percent.
The firm says its approach is to hedge against big drops in the market, so it won't fare as well during a market surge.
Since its start in September 2008, the fund has gained 1.7 percent on average per year, compared to a 0.2 percent gain for a composite index of hedge funds compiled by Hedge Fund Research Inc.
Several mutual funds that Lo's firm manages, however, have had mediocre performances.
Still, the 52-year-old Lo is widely recognized, including by Time, for his Darwinian view of the markets, in which he applies evolutionary and neurobiological models to risk and finance. He is director of the Massachusetts Institute of Technology Sloan School of Management's Laboratory for Financial Engineering.
Born in Hong Kong and raised in New York City, Lo lost his mother last year to lung cancer. He, like many people, also has watched friends and colleagues struggle with the disease in its various forms.
As an economist, he said, "I felt pretty helpless.''
So he decided to focus on an area where he could have an impact: funding sources for cancer research.
In his Nature Biotechnology paper, Lo calls the current business model for drug research and development flawed, noting that the number of drug applications per dollar of spending is declining, and pharmaceutical stocks as a group have fared poorly over the past decade.
Under Lo's proposal, the oncology fund could pour money into more speculative, early-stage research in exchange for a percentage of future royalties or proceeds from sales of intellectual property. A successful cancer drug can generate $2 billion a year in revenue, he said.
Josh Bekenstein, a managing director at the Boston investment firm Bain Capital and chairman of the board at the Dana-Farber Cancer Institute, said he would welcome any effort that puts more money into finding cancer cures.
"It's a struggle every day to try to fund the promising research that will save lives. All of us would love more money to be available,'' he said.
Perhaps the best comparison to the kind of fund Lo envisions is a drug-royalty investment group such as Royalty Pharma Inc. in New York, which buys future interests in later-stage experimental drugs. But Lo wants to target drugs earlier in the research cycle, when the outcomes are also more uncertain.
Part of his plan is to use the kind of the complex financial instruments that became notorious during the financial crisis.
He suggested creating a new kind of investment instrument: "research-backed obligations," or RSOs, using a mix of equities and debt securities to spread risk, maximize capital, and generate different levels of returns.
The debt securities, in particular, could attract investments from endowments, foundations, pension plans, and other large investors with the deep pockets needed to bankroll such a massive venture.
Mark T. Williams, who teaches finance and risk management at Boston University, said Lo's complex model for spreading risk has pluses and minuses:
"The vehicle could reduce the downside, but would it be attractive enough to investors?" Williams asked. "You also cap the potential upside."
Lo is planning a conference next year to which he will invite scientists, investment managers, venture capitalists, and large institutional investors to discuss the practical details of the megafund in greather depth.
"I've shown that when you actually look at the numbers, when you look at the financing, you can actually do a lot of good,'' Lo said. "The cancer folks don't understand this stuff. Because they're trying to cure cancer."