Failure Risk and the Cross-Section of Hedge Fund Returns

Jung-Min Kim ()
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Jung-Min Kim: Financial & Monetary Economics Team, Economic Research Institute, the Bank of Korea

No 2015-13, Working Papers from Economic Research Institute, Bank of Korea

Abstract: Modeling a hedge fund's probability of failure by a dynamic logit regression, I document that a probability of fund failure has a significantly negative effect on the fund's future returns. A quintile portfolio with highest failure probability underperforms a quintile portfolio with lowest failure probability by 5~6% per year from 1997 to 2012. The results are robust to the definition of hedge fund failure and controlling for a large set of risk factors and fund characteristics. Moreover, the negative effect of failure probability on future fund returns is stronger for funds with weak share restrictions.

Keywords: Hedge fund failure; Probability of failure; Share restrictions; Fire-sale (search for similar items in EconPapers)
JEL-codes: G23 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2015-05-08
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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2015-13.pdf Working Paper, 2015 (application/pdf)

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