SIFTING THROUGH THE WRECKAGE: LESSONS FROM RECENT HEDGE-FUND LIQUIDATIONS

Mila Getmansky · Andrew W. Lo · Shauna X. Mei

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Financial Markets and Investment Strategies Corporate Finance and Governance Private Equity and Venture Capital

Abstract

AbstractWe document the empirical properties of a sample of 1, 765 funds in the TASS Hedge Fund database from 1977 to 2004 that are no longer active. The TASS sample shows that attrition rates differ significantly across investment styles, from a low of 5.2% per year on average for convertible arbitrage funds to a high of 14.4% per year on average for managed futures funds. We relate a number of factors to these attrition rates, including past performance, volatility, and investment style, and also document differences in illiquidity risk between active and liquidated funds. We conclude with a proposal for the US Securities and Exchange Commission to play a new role in promoting greater transparency and stability in the hedge-fund industry.

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References

2000Hedge Funds: The Living and the Dead 2003High‐Water Marks and Hedge Fund Management Contracts 2001Risk Management for Hedge Funds: Introduction and Overview 2005Systemic Risk and Hedge Funds 2001The Statistical Properties of Hedge Fund Index Returns and Their Implications for Investors 1998On the Performance of Hedge Funds

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