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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27233
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| Title: | Conditions for Survival: changing risk and the performance of hedge fund
managers and CTAs |
| Authors: | Brown, Stephen J.
Goetzmann, William N.
Park, James |
| Issue Date: | 30-Jun-1999 |
| Series/Report no.: | FIN-99-077 |
| Abstract: | Investors in hedge funds and commodity trading advisors [CTA] are
naturally concerned with risk as well as return. In this paper, we
investigate whether hedge fund and CTA return variance depends upon
whether the manager is doing well or poorly. Our results are consistent
with the Brown, Harlow and Starks (1996) findings for mutual fund
managers. We find that good performers in the first half of the year
reduce the volatility of their portfolios, and poor performers increase
volatility. These “variance strategies" depend upon the
fund’s ranking relative to other funds. Interestingly enough,
despite theoretical predictions, changes in risk are not conditional
upon distance from the high water mark threshold, i.e. a ratcheting
absolute manager benchmark. This result may be explained by the relative
importance of fund termination. We analyze factors contributing to fund
disappearance. Survival depends on both absolute and relative
performance. Excess volatility can also lead to termination. Finally,
other things equal, the younger a fund, the more likely it is to fail.
Therefore our results strongly confirm an hypothesis of Fung and Hsieh
(1997b) that reputation costs have a mitigating effect on the gambling
incentives implied by the manager contract. Particularly for young
funds, a volatility strategy that increases the value of a performance
fee option may lead to the premature death of that option through
termination of the fund. The finding that hedge fund and CTA volatility
is conditional upon past performance has implications for investors,
lenders and regulators. |
| URI: | http://hdl.handle.net/2451/27233 |
| Appears in Collections: | Finance Working Papers
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