Evaluating and Predicting the Failure Probabilities of Hedge Funds

34 Pages Posted: 18 Jul 2014

See all articles by Hee Soo Lee

Hee Soo Lee

Yonsei University - School of Business

Juan Yao

University of Sydney - Business School - Finance Discipline; Financial Research Network (FIRN)

Date Written: March 17, 2014

Abstract

Hedge funds have the most sophisticated risk management practices; however, hedge funds also appear to have a short lifetime relative to other managed funds. In this study, we investigate the failure probabilities of hedge funds — particularly the failures due to financial distress. We forecast the failure probabilities of hedge funds using both a proportional hazard model and a logistic model. By utilizing a signal detection model and a relative operating characteristic curve as the prediction accuracy metrics, we found that both of the models have predictive power in the out-of-sample test. The proportional hazard model, in particular, has stronger predictive power, on average.

Keywords: Hedge fund; failure probability prediction; proportional hazard model; logit model; signal detection model; relative operating characteristic curve

JEL Classification: G33, G14, G17

Suggested Citation

Lee, Hee Soo and Yao, Juan, Evaluating and Predicting the Failure Probabilities of Hedge Funds (March 17, 2014). Available at SSRN: https://ssrn.com/abstract=2410057 or http://dx.doi.org/10.2139/ssrn.2410057

Hee Soo Lee

Yonsei University - School of Business ( email )

50 Yonsei-ro, Seodaemun-gu
Seoul, 120-749
Korea, Republic of (South Korea)

Juan Yao (Contact Author)

University of Sydney - Business School - Finance Discipline ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 93517650 (Phone)
+61 2 9351 6461 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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