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Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs

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Author Info
William N. Goetzmann () (Yale University, School of Management)
Stephen J. Brown () (Department of Finance)
James M. Park () (General)

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Abstract

We investigate whether hedge fund and commodity trading advisor [CTA] return variance is conditional upon performance in the first half of the year. Our results are consistent with the Brown, Harlow and Starks (1994) findings for mutual fund managers. We find that good performers in the first half of the year reduce the volatility of their portfolios, but not vice-versa. The result that manager "variance strategies" depend upon relative ranking not distance from the high water mark threshold is unexpected, because CTA manager compensation is based on this absolute benchmark, rather than relative to other funds or indices. We conjecture that the threat of disappearance is a significant one for hedge fund managers and CTAs. An analysis of performance preceding departure from the database shows an association between disappearance and underperformance. An analysis of the annual hazard rates shows that performers in the lowest decile face a serious threat of closure. We find evidence to support the fact that survivorship and backfilling are both serious concerns in the use of hedge fund and CTA data.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm83.

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Date of creation: 10 Feb 1998
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Handle: RePEc:ysm:somwrk:ysm83

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G2 - Financial Economics - - Financial Institutions and Services

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(2), pages 275-302.
  2. Asger Lunde & Allan Timmermann & David Blake, 1998. "The Hazards of Mutual Fund Underperformance: A Cox Regression Analysis," University of California at San Diego, Economics Working Paper Series 98-11, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  3. William N. Goetzmann & Jonathan E. Ingersoll, Jr. & Stephen A. Ross, 2004. "High Water Marks," Yale School of Management Working Papers ysm22, Yale School of Management. [Downloadable!]
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    • William N. Goetzmann & Jonathan Ingersoll, Jr. & Stephen A. Ross, 1998. "High Water Marks," NBER Working Papers 6413, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Mark M. Carhart & Jennifer N. Carpenter & Anthony W. Lynch & David K. Musto, 2002. "Mutual Fund Survivorship," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(5), pages 1439-1463.
  5. Starks, Laura T., 1987. "Performance Incentive Fees: An Agency Theoretic Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 17-32, March. [Downloadable!]
  6. Darryll Hendricks & Jayendu Patel & Richard Zeckhauser, 1997. "The J-Shape Of Performance Persistence Given Survivorship Bias," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 161-166, May. [Downloadable!] (restricted)
  7. Stephen J. Brown & William N. Goetzmann & Roger G. Ibbotson & Stephen A. Ross, 1997. "Rejoinder: The J-Shape Of Performance Persistence Given Survivorship Bias," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 167-170, May. [Downloadable!] (restricted)
  8. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(4), pages 553-80. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Arjen Siegmann & André Lucas, 2002. "Explaining Hedge Fund Investment Styles by Loss Aversion," Tinbergen Institute Discussion Papers 02-046/2, Tinbergen Institute. [Downloadable!]
  2. Francisca G.-C. Richter, B. Wade Brorsen, 2000. "Estimating fees for managed futures: a continuous-time model with a knockout feature," Applied Mathematical Finance, Taylor and Francis Journals, vol. 7(2), pages 115-125, June. [Downloadable!] (restricted)
  3. A. Harri & B. W. Brorsen, 2004. "Performance persistence and the source of returns for hedge funds," Applied Financial Economics, Taylor and Francis Journals, vol. 14(2), pages 131-141, January. [Downloadable!] (restricted)
  4. Franklin R. Edward, 1999. "Hedge Funds and the Collapse of Long-Term Capital Management," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 189-210, Spring. [Downloadable!] (restricted)
  5. Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2005. "Systemic Risk and Hedge Funds," NBER Working Papers 11200, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2007. "Systemic Risk and Hedge Funds," NBER Chapters, in: The Risks of Financial Institutions, pages 235-338 National Bureau of Economic Research, Inc. [Downloadable!]
  6. Mila Getmansky & Andrew W. Lo & Igor Makarov, 2003. "An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns," NBER Working Papers 9571, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Thomas Gimbel & Francis Gupta & Dan Pines, 2004. "Entry & Exit: The Lifecyle of a Hedge Fund," Industrial Organization 0407002, EconWPA. [Downloadable!]
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