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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27416
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| Title: | Careers and Survival: Competition and Risk in the Hedge Fund and CTA Industry |
| Authors: | Brown, Stephen J.
Goetzmann, William N.
Park, James |
| Issue Date: | 29-Oct-2000 |
| Series/Report no.: | S-AM-00-06 |
| Abstract: | Investors in hedge funds and commodity trading advisors [CTA’s]
are naturally concerned with risk as well as return. In this paper, we
investigate risk of hedge funds and CTA’s in light of managerial
career concerns. We find an association between past performance and
risk levels consistent with Brown, Harlow and Starks (1996) findings for
mutual fund managers. 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. The importance of relative
rankings as opposed to the absolute ranking suggested by analysis of
hedge fund and CTA manager contracts points to the importance of
reputation costs. These costs are best thought of in the context of the
career concerns of managers and 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 disappear from the sample.
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. An important result of our finding is that
variance strategy depends upon relative rather than absolute performance evaluation. |
| URI: | http://hdl.handle.net/2451/27416 |
| Appears in Collections: | Asset Management
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