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Predicting Hedge Fund Failure: A Comparison of Risk Measures

46 Pages Posted: 30 Apr 2007 Last revised: 11 Sep 2009

Bing Liang

University of Massachusetts Amherst - Department of Finance

Hyuna Park

Brooklyn College - CUNY

Date Written: February 2008

Abstract

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.

Keywords: hedge fund failure, downside risk, expected shortfall, VaR, attrition rate

JEL Classification: G11, G12, C31

Suggested Citation

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

Bing Liang (Contact Author)

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

Hyuna Park

Brooklyn College - CUNY ( email )

2900 Bedford Ave
Brooklyn, NY NY 11210
United States

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