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Predicting Hedge Fund Failure: A Comparison of Risk Measures

Published online by Cambridge University Press:  26 November 2009

Bing Liang and
Hyuna Park
Bing Liang
Affiliation:
Isenberg School of Management, University of Massachusetts at Amherst, 121 Presidents Dr., Amherst, MA 01003. bliang@som.umass.edu
Hyuna Park
Affiliation:
College of Business, Minnesota State University Mankato, 150 Morris Hall, Mankato, MN 56001. hyuna.park@mnsu.edu
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Abstract

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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 investment strategies, 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 that 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 during the period of 1995–2004.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 1 , February 2010, pp. 199 - 222
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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