Not Available for Download

Estimating Operational Risk for Hedge Funds: The Omega-Score

Posted: 31 Jan 2009  

Stephen J. Brown

New York University - Stern School of Business

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Bing Liang

University of Massachusetts Amherst - Department of Finance

Christopher Schwarz

University of California at Irvine

Date Written: January, 30 2009

Abstract

Using a complete set of U.S. SEC filing information on hedge funds (Form ADV) and data from the Lipper TASS Hedge Fund Database, the study reported here developed a quantitative model called the É-score to measure hedge fund operational risk. The É-score is related to conflict-of-interest issues, concentrated ownership, and reduced leverage in the Form ADV data. With a statistical methodology, the study further related the É-score to such readily available information as fund performance, volatility, size, age, and fee structures. Finally, the study demonstrated that although operational risk is more significant than financial risk in explaining fund failure, a significant and positive interaction exists between operational risk and financial risk.

Keywords: Risk Measurement and Management: Alternative Investments; Portfolio Management: Hedge Fund strategies; Alternative Investments: Hedge Fund Strategies

Suggested Citation

Brown, Stephen J. and Goetzmann, William N. and Liang, Bing and Schwarz, Christopher, Estimating Operational Risk for Hedge Funds: The Omega-Score (January, 30 2009). Financial Analysts Journal, Vol. 65, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=1335449

Stephen J. Brown

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)

William N. Goetzmann (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Ave.
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5950 (Phone)
203-436-9252 (Fax)

HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Bing Liang

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

Christopher Schwarz

University of California at Irvine ( email )

Irvine, CA 92697-3125
United States

Paper statistics

Abstract Views
2,253