To read this content please select one of the options below:

On Estimating the Failure Probability of Hedge Funds

Research in Finance

ISBN: 978-0-85724-541-0, eISBN: 978-0-85724-542-7

Publication date: 26 April 2011

Abstract

The main purpose of this chapter is to estimate a model for hedge fund returns that will endogenously generate failure probabilities using panel data where sample attrition due to fund failures is a dominant feature. We use the Lipper (TASS) hedge fund database, which includes all live and defunct hedge funds over the period January 1994 through March 2009, to estimate failure probabilities for hedge funds. Our results show that hedge fund failure prediction can be substantially improved by accounting for selectivity bias caused by censoring in the sample. After controlling for failure risk, we find that capital flow, lockup period, redemption notice period, and fund age are significant factors in explaining hedge fund returns. We also show that for an average hedge fund, failure risk increases substantially with age. Surprisingly, a 5-year-old fund on average has only a 65% survival rate.

Citation

Lahiri, K., Shawky, H.A. and Zhao, Y. (2011), "On Estimating the Failure Probability of Hedge Funds", Kensinger, J.W. (Ed.) Research in Finance (Research in Finance, Vol. 27), Emerald Group Publishing Limited, Leeds, pp. 85-119. https://doi.org/10.1108/S0196-3821(2011)0000027005

Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited