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Estimating Operational Risk for Hedge Funds: The Omega-ScoreStephen J. BrownNew York University - Stern School of Business William N. GoetzmannYale School of Management - International Center for Finance; National Bureau of Economic Research (NBER) Bing LiangUniversity of Massachusetts at Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR) Christopher SchwarzUniversity of California at Irvine January, 30 2009 Financial Analysts Journal, Vol. 65, No. 1, 2009 Abstract: 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 Accepted Paper SeriesDate posted: January 31, 2009Suggested CitationContact Information
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