Not every academic is treated well by hedge fund managers. But when Andrew Lo, who is both a finance professor at the Massachusetts Institute of Technology and a quantitative manager for AlphaSimplex Group, writes a research paper, the industry takes notice.

In an article titled "Systemic Risk and Hedge Funds," Lo sounds an alarm over the "symbiotic relationship" between hedge funds and banks. He says that the risk exposure of the hedge fund industry may have a material impact on the banking sector.

As Long-Term Capital Management illustrated, hedge funds are exposed to two main risks: illiquidity and leverage. With banks becoming more and more dependent on hedge funds as sources of banking and brokerage fees, their exposure to the same problem is "currently on the rise," Lo says.

Citing a 2003 analysis of more than 100 liquidated hedge funds, Lo says that half were the result of operational risk, including fraud. Common operational issues included the misrepresentation of fund investments (41% of the cases), misappropriation of investor funds (30%), unauthorized trading (14%) and inadequate resources (6% of the sample.)

The upshot is that hedge funds represent a different type of risk than banks are used to dealing with.

Top Dog

UBS made news this week by announcing that it plans to sell its asset management firm GAM and three private banks to Zurich-based Julius Baer. Baer is paying about $4.5 billion, including a 21.5% stake in itself, for the assets, and will become Switzerland's largest wealth manager.

GAM, founded in 1983 and acquired by UBS in 1999, is a pioneer in the business of selecting hedge fund managers. It currently has $20 billion of such assets under management. It also directly runs hedge funds across various strategies in Japan, Europe and the U.K, with estimated assets or $4 billion.

David Solo, currently CEO of GAM, will be head of Julius Baer's asset management unit, reporting directly to CEO Hans de Gier.

Both companies are important players in private banking and asset management. They also are established European powerhouses that have more exposure to Europe and Asia than to the U.S. With the acquisition of GAM, Julius Baer now will be able to access a huge global hedge fund platform.

Best Ideas

Third Point, the $4 billion activist hedge fund founded in 1995 by Dan Loeb, is expanding its management team. Loeb appointed James Kelly as president and chief operating officer, a newly created position. Kelly, the co-founder of Moore Capital Management with Louis Bacon in 1989, is an industry veteran. In 1994, he founded a hedge fund administration and trade service firm called International Fund Services. IFS was purchased by

State Street

three years ago; Kelly was still its CEO before joining Third Point.

While Loeb is likely to focus more on investing and activism, Kelly's role will be to oversee the day-to-day operation of the firm as well as its business development, risk management and client services.

AIG Hedge

AIG Global Investment Group, the gigantic asset management arm of AIG with a $502 billion insurance and asset management portfolio, isn't well known for its alternative investment business, but it has one. Robert T. Thompson was recently appointed senior managing director alternative investments, responsible for all private equity and hedge fund activities globally. He replaces Larry Mellinger, who retired in December.

Based in New York, Thompson will report to Win Neuger, AIG's chief investment officer and the CEO of the global investment group. Thompson, with a private equity background, joined from Ferrer Freeman Thompson & Co., a Greenwich, Conn., private equity fund that invests in health care. Prior to creating his own shop, he was a managing director and equity group leader at GE Capital, building up its private equity business.

Altered State

There's always a lesson to learn from a bad experience, and the scandal at Bayou Fund is no exception. While regulators are still hunting for several million dollars that appear missing from the Connecticut-based hedge fund, they have, at least at the state level, decided to pool their regulatory resources to create a task force aimed at preventing future disasters, according to Connecticut Attorney General Richard Blumenthal.

The Connecticut Department of Banking is part of the effort and both state organizations are reaching out to other agencies. Most of the members, it is hoped, will come from the private sector, including hedge fund managers and hedge fund investors.

"The Bayou problems are the latest in a series of failures and sometimes frauds that have risen over the past year," Blumenthal says. Why the rise? Because more and more people that may not be sophisticated or wealthy investors are now investing in hedge funds, he says. Although most hedge funds will become regulated next year by the

Securities and Exchange Commission

, right now, "there is a complete absence of real regulation," he says.

The task force will ask hedge funds to offer more disclosure. So far, most managers have supported the plan. "The honest ones are interested in the credibility of the industry," Blumenthal says.

Harvard Out of Korea

About two weeks after the

Korea Equity Fund

(KEF)

rejected Harvard's proposal to liquidate the fund, Harvard, via Sowood Capital Management, sold its 29% stake. According to a 13D filed Aug. 31, Harvard sold 2.44 million shares in a block trade at $7.02 a share. The campaign to end Korea Equity's closed-end status took a hit when David Nierenberg defected from the activist camp in June. Is Sowood giving up the battle for good now?

Down and Out

Olea Capital, a London-based global macro manager, is reportedly closing its doors while facing a massive outflow of money. The

Times

of London reported the closing of the $450 fund earlier this week.

Global macro, in which managers make leveraged bets on economic and political developments around the world, has been having a tough year, and Olea is not alone having difficulties. Other large shops, including Vega Capital Partners, have posted lackluster returns, at least compared with last year. According to the FTSE global macro index, the strategy is down 6.25% year to date as of Aug. 25.

Olea's founder, Tim Yetman, did not return a call and did not respond to an email seeking comments.