Estimating Operational Risk for Hedge Funds: The ?-Score

Stephen Brown (), William Goetzmann, Bing Liang and Christopher Schwarz

Yale School of Management Working Papers from Yale School of Management

Abstract: Using a complete set of the SEC filing information on hedge funds (Form ADV) and the TASS data, we develop a quantitative model called the ?-Score to measure hedge fund operational risk. The ?-Score is related to conflict of interest issues, concentrated ownership, and reduced leverage in the ADV data. With a statistical methodology, we further relate the ?-Score to readily available information such as fund performance, volatility, size, age, and fee structures. Finally, we demonstrate that while operational risk is more significant than financial risk in explaining fund failure, there is a significant and positive interaction between operational risk and financial risk. This is consistent with rogue trading anecdotes that suggest that fund failure associated with excessive risk taking occurs when operational controls and oversight are weak.

Keywords: mutual funds; hedge funds; investments; the Omega Score (search for similar items in EconPapers)
Date: 2008-01-25, Revised 2009-09-11
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Citations: View citations in EconPapers (1)

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