Market conditions and hedge fund survival

Mark Carlson and Jason Steinman

No 2008-28, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: As the hedge fund industry has grown, there has been increased concern that, during sharp market moves, hedge fund failures could exacerbate the deterioration in financial conditions and deepen a crisis. However, there has not been much formal analysis regarding the impact of financial market conditions on hedge fund survival. To help fill this gap, this paper examines the relationship between financial market conditions and the likelihood of hedge fund failure after controlling for performance and other characteristics. The analysis is conducted using data on individual funds and industry aggregates. We find that market returns and volatility influence fund failures, although the impact depends on the funds' investment strategies. The results of the analysis are then used to predict hedge fund failures based on actual market returns and on stress scenarios. We find that the hedge fund industry is generally robust to different shocks.

Keywords: Hedge; funds (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 2008
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