Sifting Through the Wreckage: Lessons from Recent Hedge-Fund Liquidations

Lo, Andrew W.; Getmansky Sherman, Mila; Mei, Shauna X.

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Sifting Through the Wreckage: Lessons from Recent Hedge-Fund Liquidations

Journal of Investment Management, 4th Quarter, 2004

44 Pages Posted: 22 Nov 2004

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance

Shauna X. Mei

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Abstract

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document the empirical properties of a sample of 1,765 funds in the TASS Hedge Fund database from 1994 to 2004 that are no longer active.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: G12, G20, G33

Suggested Citation: Suggested Citation

Lo, Andrew W. and Getmansky Sherman, Mila and Mei, Shauna X., Sifting Through the Wreckage: Lessons from Recent Hedge-Fund Liquidations. Journal of Investment Management, 4th Quarter, 2004, Available at SSRN: https://ssrn.com/abstract=622521