Sifting Through the Wreckage: Lessons from Recent Hedge Fund Failures
University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance & Operations Management
Andrew W. Lo
Massachusetts Institute of Technology (MIT) - Sloan School of Management; Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); National Bureau of Economic Research (NBER)
Shauna X. Mei
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Journal of Investment Management, Vol. 3, No. 4, Fourth Quarter 2004
We document the empirical properties of a sample of 1,765 funds in the TASS Hedge Fund database from 1994 to 2004 that are no longer active. The TASS sample shows that attrition rates differ significantly across investment styles, from a low of 5.2% per year on average for convertible arbitrage funds to a high of 14.4% per year on average for managed futures funds. We relate a number of factors to these attrition rates, including past performance, volatility, and investment style, and also document differences in illiquidity risk between active and liquidated funds. We conclude with a proposal for the U.S. Securities and Exchange Commission to play a new role in promoting greater transparency and stability in the hedge-fund industry.
Keywords: Hedge funds, risk management, liquidity
JEL Classification: G00Accepted Paper Series
Date posted: December 10, 2004
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