Lecture: Risk Measures for Hedge Funds and a Survival Analysis
Ph.D. student in Finance, Hyuna Park will be the guest speaker at this week's Finance Seminar Series. She will be speaking about her recent paper "Risk Measures for Hedge Funds and a Survival Analysis". All are invited to attend.
Abstract
This paper examines the best risk measure in predicting the survival of hedge funds. We compare various risk measures such as semi-deviation, value-at-risk (VaR), expected shortfall (ES) and tail risk (TR) with the traditional standard deviation measure. We use the Cox (1972) proportional hazard model modified by Anderson and Gill (1982) to incorporate calendar time and to allow the time-varying covariates in the model. Using TASS data from January 1995 to December 2004, we find that funds with high ES have low probability of survival when controlling for other factors such as the style effect, performance, fund age, size, high-water mark provision, lockup, and leverage. Standard deviation, however, loses the explanatory power when the other explanatory variables are included. We also show that performance is the most important variable in predicting the failure of hedge funds. In addition, we find that liquidated hedge funds have lower risk than other hedge funds with different drop reasons in the graveyard data. After calibrating hedge fund failure with simple criteria such as the last six-month return and change in fund size rather than the stated drop reasons, we find that ES is better than standard deviation in predicting ????real failure????. We reexamine the attrition rate of hedge funds based on these findings and argue that the real failure rate of hedge funds (3.1%) is lower than the attrition rate (8.7%, annual average during 1995 - 2004).
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