n Investment Analysts Journal - Evaluating and predicting the failure probabilities of hedge funds

Volume 44, Issue 2
  • ISSN : 1029-3523
  • E-ISSN: 2077-0227
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Hedge funds have the most sophisticated risk management practices; however, they also appear to have a short lifetime relative to other managed funds. In this study we investigate the failure probabilities of hedge funds - particularly the failures due to financial distress. We forecast the failure probabilities of hedge funds using both a proportional hazard model and a logistic model. By utilising a signal detection model and a relative operating characteristic curve as the prediction accuracy metrics, we found that both models have predictive power in the out-of-sample test. The proportional hazard model, in particular, has stronger predictive power, on average.

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