Estimating Operational Risk for Hedge Funds: The Omega-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)
University of Massachusetts Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)
University of California at Irvine
January, 30 2009
Financial Analysts Journal, Vol. 65, No. 1, 2009
Using a complete set of U.S. SEC filing information on hedge funds (Form ADV) and data from the Lipper TASS Hedge Fund Database, the study reported here developed a quantitative model called the É-score to measure hedge fund operational risk. The É-score is related to conflict-of-interest issues, concentrated ownership, and reduced leverage in the Form ADV data. With a statistical methodology, the study further related the É-score to such readily available information as fund performance, volatility, size, age, and fee structures. Finally, the study demonstrated that although operational risk is more significant than financial risk in explaining fund failure, a significant and positive interaction exists between operational risk and financial risk.
Keywords: Risk Measurement and Management: Alternative Investments; Portfolio Management: Hedge Fund strategies; Alternative Investments: Hedge Fund Strategies
Date posted: January 31, 2009
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