Recovering Delisting Returns of Hedge Funds

Jackwerth, Jens Carsten and Kolokolova, Olga and Hodder, James E. (2008): Recovering Delisting Returns of Hedge Funds.

Abstract

Numerous hedge funds stop reporting to commercial databases each year. An issue for hedgefund performance estimation is: what delisting return to attribute to such funds? This would be particularly problematic if delisting returns are typically very different from continuing funds’ returns. In this paper, we use estimated portfolio holdings for funds-of-funds with reported returns to back out maximum likelihood estimates for hedge-fund delisting returns. The estimated mean delisting return for all exiting funds is small, although statistically significantly different from the average observed returns for all reporting hedge funds. These findings are robust to relaxing several underlying assumptions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Hedge Funds
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors

References

Ackermann, Carl, Richard McEnally, and David Ravenscraft, 1999, The Performance of Hedge Funds, Journal of Finance 54, No. 1, 833-874.

Bai, Jushan, 2003, Inferential Theory for Factor Models of Large Dimensions, Econometrica 71, No. 1, 135-171.

Bai, Jushan, and Serena Ng, 2003, Determining the Number of Factors in Approximate Factor Models, Econometrica 70, No. 1, 191-221.

Boivina, Jean, and Serena Ng, 2006, Are More Data Always Better for Factor Analysis?, Journal of Econometrics 132, No. 1, 169-194.

Brooks, Chris, Andrew Clare, and Nick Motson, 2007, The Gross Truth about Hedge Fund Performance and Risk: The Impact of Incentive Fees, Working Paper, University of Reading, SSRN=1031096.

Brown, S. J., W. N. Goetzmann, and R. G. Ibbotson, 1999, Offshore Hedge Funds: Survival and Performance, 1989-95, Journal of Business 72, No. 1, 91-117.

Fung, William, and David A. Hsieh, 2000, Performance Characteristics of Hedge Funds and CTA Funds: Natural Versus Spurious Biases, Journal of Financial and Quantitative Analysis 35, No. 3, 291-307.

Fung, William, David A. Hsieh, Narayan Y. Naik, and Tarun Ramadorai, 2008, Hedge Funds: Performance, Risk, and Capital Formation, Journal of Finance 63, No. 4, 1777-1803.

ter Horst, Jenke, and Marno Verbeek, 2007, Fund liquidation, Self-selection and Look-ahead Bias in the Hedge Fund Industry, Review of Finance 11, No. 4, 605-632.

Liang, Bing, 2000, Hedge Funds: The Living and the Dead, Journal of Financial and Quantitative Analysis 35, No. 3, 309-326.

Posthuma, Nolke, and Pieter Jelle van der Sluis, 2004, A Critical Examination of Historical Hedge Fund Returns, Chapter 13 in Intelligent Hedge Fund Investing: Successfully Avoiding Pitfalls through Better Risk Evaluation. Edited by Barry Schachter. Risk Books.

Stock, J.H., and M.W. Watson, 2002, Macroeconomic Forecasting Using Diffusion Indexes, Journal of Business and Economic Statistics 20, No. 2, 147-162.

Van, George P., and Zhiyi Song, 2005, Hedge Fund Commentary from VAN, Working Paper, Van Hedge Fund Advisors International, www.edge-fund.com/VanSong2005.pdf