Stop-loss early termination clause and hedge fund performance
Ningjing Pang and
Pacific-Basin Finance Journal, 2022, vol. 75, issue C
This paper is the first to empirically examine the incidence, determinants, and consequences of the stop-loss early termination clauses (SLCs) in the hedge fund industry. The SLCs force hedge funds to be terminated when their cumulative losses breach certain thresholds. We find 14% of hedge funds in China have SLCs. Fund management companies with higher previous performance and risks are more likely to establish funds with SLCs. And funds with SLCs generate higher future performance. Further, funds become more risk-averse when they approach to the termination thresholds, especially for large funds. We attribute the better performance of funds with SLCs to prompt terminations of bad performing funds.
Keywords: Hedge funds; Stop-loss clause; Termination risk (search for similar items in EconPapers)
JEL-codes: G12 G20 G23 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:75:y:2022:i:c:s0927538x2200155x
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