Predicting Hedge Fund Failure: A Comparison of Risk Measures
46 Pages Posted: 30 Apr 2007 Last revised: 11 Sep 2009
Date Written: February 2008
Abstract
This paper compares downside risk measures that incorporate higher return moments with traditional risk measures such as standard deviation in predicting hedge fund failure. When controlling for styles, performance, fund age, size, lockup, high-water mark, and leverage, we find that funds with larger downside risk have a higher hazard rate. However, standard deviation loses the explanatory power once the other explanatory variables are included in the hazard model. Further, we find liquidation does not necessarily mean failure in the hedge fund industry. By reexamining the attrition rate, we show that the real failure rate of 3.1% is lower than the attrition rate of 8.7% on an annual basis from the period of 1995-2004.
Keywords: hedge fund failure, downside risk, expected shortfall, VaR, attrition rate
JEL Classification: G11, G12, C31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Offshore Hedge Funds: Survival and Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
Offshore Hedge Funds: Survival and Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
Characteristics of Risk and Return in Risk Arbitrage
By Mark L. Mitchell and Todd C. Pulvino
-
Offshore Hedge Funds: Survival & Performance 1989-1995
By William N. Goetzmann, Roger G. Ibbotson, ...
-
Offshore Hedge Funds: Survival & Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns
By Mila Getmansky Sherman, Andrew W. Lo, ...
-
An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns
By Mila Getmansky Sherman, Andrew W. Lo, ...
-
Hedge Funds: The Living and the Dead
By Bing Liang
-
Flows, Performance, and Managerial Incentives in Hedge Funds
By Vikas Agarwal, Naveen D. Daniel, ...