Failure Risk and the Cross-Section of Hedge Fund Returns

Jung Min Kim

doi:10.1111/fima.12101

Failure Risk and the Cross-Section of Hedge Fund Returns

Jung Min Kim

School of Business Administration

Research output: Contribution to journal › Article › peer-review

4 Scopus citations

Abstract

Modeling a hedge fund's probability of failure with a dynamic logit regression, I find that the probability of a fund's failure has a significantly negative effect on the fund's future returns. A quintile portfolio with the highest failure probability underperforms a quintile portfolio with the lowest failure probability by 5% to 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.

Original language	English
Pages (from-to)	845-876
Number of pages	32
Journal	Financial Management
Volume	45
Issue number	4
DOIs	https://doi.org/10.1111/fima.12101
State	Published - 1 Dec 2016

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10.1111/fima.12101

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abstract = "Modeling a hedge fund's probability of failure with a dynamic logit regression, I find that the probability of a fund's failure has a significantly negative effect on the fund's future returns. A quintile portfolio with the highest failure probability underperforms a quintile portfolio with the lowest failure probability by 5\% to 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.",

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Failure Risk and the Cross-Section of Hedge Fund Returns

Abstract

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