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Failure Risk and the Cross-Section of Hedge Fund Returns

Author

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  • Jung-Min KIM

    (Financial & Monetary Economics Team, Economic Research Institute, the Bank of Korea)

Abstract

Modeling a hedge fund's probability of failure by a dynamic logit regression, I document that a probability of fund failure has a significantly negative effect on the fund's future returns. A quintile portfolio with highest failure probability underperforms a quintile portfolio with lowest failure probability by 5~6% 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.

Suggested Citation

  • Jung-Min KIM, 2015. "Failure Risk and the Cross-Section of Hedge Fund Returns," Working Papers 2015-13, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1513
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    References listed on IDEAS

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    More about this item

    Keywords

    Hedge fund failure; Probability of failure; Share restrictions; Fire-sale;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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