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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

Abstract:     
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

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Date posted: February 10, 1998  

Suggested Citation

Goetzmann, William N. and Brown, Stephen J. and Park, James M., Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs (November 15, 1997). Yale School of Management Working Paper No. F-59. Available at SSRN: http://ssrn.com/abstract=58477 or http://dx.doi.org/10.2139/ssrn.58477

Contact Information

William N. Goetzmann (Contact Author)
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
Stephen J. Brown
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)
James M. Park
PARADIGM Capital Management ( email )
12 East 49th Street, 32nd floor
New York, NY 10017
United States
212-271-3388 (Phone)
212-271-3393 (Fax)
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