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Stop-loss early termination clause and hedge fund performance

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  • Hong, Xin
  • Pang, Ningjing
  • Wang, Zhibin

Abstract

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.

Suggested Citation

  • Hong, Xin & Pang, Ningjing & Wang, Zhibin, 2022. "Stop-loss early termination clause and hedge fund performance," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:pacfin:v:75:y:2022:i:c:s0927538x2200155x
    DOI: 10.1016/j.pacfin.2022.101860
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    References listed on IDEAS

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    More about this item

    Keywords

    Hedge funds; Stop-loss clause; Termination risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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