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

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  • Stephen Brown
  • William Goetzmann
  • James Park

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

Suggested Citation

  • Stephen Brown & William Goetzmann & James Park, 1998. "Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs," Yale School of Management Working Papers ysm83, Yale School of Management, revised 01 Apr 2008.
    • Handle: RePEc:ysm:wpaper:ysm83
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    1. Lunde, Asger & Timmermann, Allan & Blake, David, 1999. "The hazards of mutual fund underperformance: A Cox regression analysis," Journal of Empirical Finance, Elsevier, vol. 6(2), pages 121-152, April.
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    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.
    7. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 553-580.
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    10. 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.
    11. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
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    Cited by:

    1. A. Harri & B. W. Brorsen, 2004. "Performance persistence and the source of returns for hedge funds," Applied Financial Economics, Taylor & Francis Journals, vol. 14(2), pages 131-141.
    2. 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 235-330, National Bureau of Economic Research, Inc.
    3. Getmansky, Mila & Lo, Andrew W. & Makarov, Igor, 2004. "An econometric model of serial correlation and illiquidity in hedge fund returns," Journal of Financial Economics, Elsevier, vol. 74(3), pages 529-609, December.
    4. Agarwal, Vikas & Boyson, Nicole M. & Naik, Narayan Y., 2007. "Hedge funds for retail investors? An examination of hedged mutual funds," CFR Working Papers 07-04, University of Cologne, Centre for Financial Research (CFR).
    5. Gaurav S. Amin & Harry M. Kat, 2001. "Welcome to the Dark Side - Hedge Fund Attrition and Survivorship Bias over the period 1994-2001," ICMA Centre Discussion Papers in Finance icma-dp2002-02, Henley Business School, University of Reading, revised Jan 2002.
    6. 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.
    7. Francisca Richter & B. Wade Brorsen, 2000. "Estimating fees for managed futures: a continuous-time model with a knockout feature," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(2), pages 115-125.
    8. Nicole Boyson & Robert Mooradian, 2011. "Corporate governance and hedge fund activism," Review of Derivatives Research, Springer, vol. 14(2), pages 169-204, July.
    9. Thomas Gimbel & Francis Gupta & Dan Pines, 2004. "Entry & Exit: The Lifecyle of a Hedge Fund," Industrial Organization 0407002, University Library of Munich, Germany.

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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