Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs
William N. Goetzmann
Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)
Stephen J. Brown
New York University - Stern School of Business
James M. Park
PARADIGM Capital Management
November 15, 1997
Yale School of Management Working Paper No. F-59
We investigate whether hedge fund and commodity trading advisor [CTA] return variance is conditional upon performance in the first half of the year. Our results are consistent with the Brown, Harlow and Starks (1994) findings for mutual fund managers. We find that good performers in the first half of the year reduce the volatility of their portfolios, but not vice-versa. The result that manager "variance strategies" depend upon relative ranking not distance from the high water mark threshold is unexpected, because CTA manager compensation is based on this absolute benchmark, rather than relative to other funds or indices. We conjecture that the threat of disappearance is a significant one for hedge fund managers and CTAs. An analysis of performance preceding departure from the database shows an association between disappearance and underperformance. An analysis of the annual hazard rates shows that performers in the lowest decile face a serious threat of closure. We find evidence to support the fact that survivorship and backfilling are both serious concerns in the use of hedge fund and CTA data.
Number of Pages in PDF File: 28
JEL Classification: G2
Date posted: February 10, 1998
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