Skip to main content

Survival Analysis of Hedge Funds

March 2006
Naohiko Baba*1
Hiromichi Goko*2

Abstract

This paper applies a survival analysis to individual hedge fund data reported in the Lipper TASS database. We use several methodologies including the non-parametric survival analysis, the Semi-parametric Cox proportional hazard analysis with shared frailty, and the logit analysis to assess the effects of both fund-specific characteristics and the dynamic performance properties on survival probabilities of hedge funds. Estimation results are summarized as follows. (i) Funds with higher returns, assets under management (AUM), and recent fund flows, and funds with lower volatilities and higher skewness of returns and AUM have higher survival probabilities. (ii) Incentive scheme matters for survival probabilities, and the directions of the effects differ depending on the measures: funds with higher incentive fees have lower survival probabilities, while those with a high water mark have higher survival probabilities. (iii) Cancellation policies as proxies for liquidity constraints matter: funds with a longer redemption notice period and a lower redemption frequency have higher survival probabilities. (iv) As the number of total hedge funds becomes larger, survival probability significantly falls. (v) On the other hand, leverage does not significantly influence survival probabilities.

Key Words:
Hedge funds, High Water Mark, Incentive Fees, Survival Analysis,Panel Logit

JEL Classification: G11, G12, G13

The authors are grateful for comments and suggestions to the participants in 2006 Hitotsubashi Conferenceon Econometrics, particularly to Hiroki Tsurumi. We also greatly benefited from discussions with ToshikiYotsuzuka, Gary Crowder, Tomohiro Miura and other staff of the Financial Markets Department of theBank of Japan. Any remaining errors are solely our responsibility. The views expressed in this paper are thoseof the authors and do not necessarily reflect the views of the Bank of Japan.

  1. *1Senior Economist and Director, Institute for Monetary and Economic Studies and Financial Markets Department, Bank of Japan
    e-mail:naohiko.baba@boj.or.jp
  2. *2Economist, Financial Markets Department, Bank of Japan
    e-mail: hiromichi.gouko@boj.or.jp

Notice

Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussions and comments. The views expressed are those of the authors and do not necessarily reflect those of the Bank.

If you have any comments or questions on the working paper series, please contact either author.

All rights reserved. Reprint or reproduction of this paper without permission is prohibited.