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

Author

Listed:
  • WILLIAM N. GOETZMANN

    (Yale School of Management, International Center for Finance)

  • STEPHEN J. BROWN

    (NYU Stern School of Business)

  • JAMES M. PARK

    (PARADIGM Capital Management - General)

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.

Suggested Citation

  • William N. Goetzmann & Stephen J. Brown & James M. Park, 2004. "Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs," Yale School of Management Working Papers ysm10, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm10
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    Cited by:

    1. 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.
    2. 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.
    3. Nicole Boyson & Robert Mooradian, 2011. "Corporate governance and hedge fund activism," Review of Derivatives Research, Springer, vol. 14(2), pages 169-204, July.
    4. 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.
    5. 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.
    6. 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).
    7. Thomas Gimbel & Francis Gupta & Dan Pines, 2004. "Entry & Exit: The Lifecyle of a Hedge Fund," Industrial Organization 0407002, University Library of Munich, Germany.
    8. 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.
    9. 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.

    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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