Sifting Through the Wreckage: Lessons from Recent Hedge Fund Failures

Journal of Investment Management, Vol. 3, No. 4, Fourth Quarter 2004

Posted: 10 Dec 2004

See all articles by Mila Getmansky Sherman

Mila Getmansky Sherman

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

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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document the empirical properties of a sample of 1,765 funds in the TASS Hedge Fund database from 1994 to 2004 that are no longer active.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: G00

Suggested Citation

Getmansky Sherman, Mila and Lo, Andrew W. and Mei, Shauna X., Sifting Through the Wreckage: Lessons from Recent Hedge Fund Failures. Journal of Investment Management, Vol. 3, No. 4, Fourth Quarter 2004. Available at SSRN: https://ssrn.com/abstract=629462

Mila Getmansky Sherman (Contact Author)

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

Amherst, MA 01003-4910
United States

Andrew W. Lo

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

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Stata Center
Cambridge, MA 02142
United States

Shauna X. Mei

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

100 Main Street
E62-416
Cambridge, MA 02142
United States

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