23 Pages Posted: 25 Jan 2008 Last revised: 11 Sep 2009
Date Written: May 2008
Using a complete set of the SEC filing information on hedge funds (Form ADV) and the TASS data, we develop a quantitative model called the ω-Score to measure hedge fund operational risk. The ω-Score is related to conflict of interest issues, concentrated ownership, and reduced leverage in the ADV data. With a statistical methodology, we further relate the ω-Score to readily available information such as fund performance, volatility, size, age, and fee structures. Finally, we demonstrate that while operational risk is more significant than financial risk in explaining fund failure, there is a significant and positive interaction between operational risk and financial risk. This is consistent with rogue trading anecdotes that suggest that fund failure associated with excessive risk taking occurs when operational controls and oversight are weak.
Keywords: mutual funds, hedge funds, investments, the Omega Score
Suggested Citation: Suggested Citation
Brown, Stephen J. and Goetzmann, William N. and Liang, Bing and Schwarz, Christopher, Estimating Operational Risk for Hedge Funds: The ω-Score (May 2008). Yale ICF Working Paper No. 08-08. Available at SSRN: https://ssrn.com/abstract=1086341
By Bing Liang