Abstract

http://ssrn.com/abstract=1086341
 
 

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Estimating Operational Risk for Hedge Funds: The ω-Score


Stephen J. Brown


New York University - Stern School of Business

William N. Goetzmann


Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Bing Liang


University of Massachusetts at Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)

Christopher Schwarz


University of California at Irvine

May 2008

Yale ICF Working Paper No. 08-08

Abstract:     
Using a complete set of the SEC filing information on hedge funds (Form ADV) and the TASS data, we develop a quantitative model called the ω-Score to measure hedge fund operational risk. The ω-Score is related to conflict of interest issues, concentrated ownership, and reduced leverage in the ADV data. With a statistical methodology, we further relate the ω-Score to readily available information such as fund performance, volatility, size, age, and fee structures. Finally, we demonstrate that while operational risk is more significant than financial risk in explaining fund failure, there is a significant and positive interaction between operational risk and financial risk. This is consistent with rogue trading anecdotes that suggest that fund failure associated with excessive risk taking occurs when operational controls and oversight are weak.

Number of Pages in PDF File: 23

Keywords: mutual funds, hedge funds, investments, the Omega Score

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Date posted: January 25, 2008 ; Last revised: September 11, 2009

Suggested Citation

Brown, Stephen J. and Goetzmann, William N. and Liang, Bing and Schwarz, Christopher, Estimating Operational Risk for Hedge Funds: The ω-Score (May 2008). Yale ICF Working Paper No. 08-08. Available at SSRN: http://ssrn.com/abstract=1086341

Contact Information

Stephen J. Brown (Contact Author)
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)
William N. Goetzmann
Yale School of Management - International Center for Finance ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5950 (Phone)
203-432-8931 (Fax)
HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Bing Liang
University of Massachusetts at Amherst - Department of Finance & Operations Management ( email )
Amherst, MA 01003
United States
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

Christopher Schwarz
University of California at Irvine ( email )
Irvine, CA 92697-3125
United States
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