Predicting Hedge Fund Failure: A Comparison of Risk Measures
University of Massachusetts at Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)
Minnesota State University
This paper compares downside risk measures that incorporate higher return moments with traditional risk measures such as standard deviation in predicting hedge fund failure. When controlling for styles, performance, fund age, size, lockup, high-water mark, and leverage, we find that funds with larger downside risk have a higher hazard rate. However, standard deviation loses the explanatory power once the other explanatory variables are included in the hazard model. Further, we find liquidation does not necessarily mean failure in the hedge fund industry. By reexamining the attrition rate, we show that the real failure rate of 3.1% is lower than the attrition rate of 8.7% on an annual basis from the period of 1995-2004.
Number of Pages in PDF File: 46
Keywords: hedge fund failure, downside risk, expected shortfall, VaR, attrition rate
JEL Classification: G11, G12, C31working papers series
Date posted: April 30, 2007 ; Last revised: September 11, 2009
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.453 seconds