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Predicting Hedge Fund Failure: A Comparison of Risk Measures

Bing Liang

affiliation not provided to SSRN; China Academy of Financial Research (CAFR)

Hyuna Park

Minnesota State University

February 2008

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, C31

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Date posted: April 30, 2007 ; Last revised: September 11, 2009

Suggested Citation

Liang, Bing and Park, Hyuna, Predicting Hedge Fund Failure: A Comparison of Risk Measures (February 2008). Available at SSRN: http://ssrn.com/abstract=983209 or http://dx.doi.org/10.2139/ssrn.983209

Contact Information

Bing Liang (Contact Author)
affiliation not provided to SSRN
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China 200030
Hyuna Park
Minnesota State University ( email )
150 Morris Hall
Mankato, MN 56001
United States
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References:  72
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