Survival Of The Hedge Fund Fittest

Two working papers from opposite sides of the world have come up with similar findings on the survival rate of hedge funds. That issued by The Bank of Japan concludes that funds with more AUM, higher returns and recent inflows have a greater chance of survival; funds with higher incentives fees have lower survival probabilities; the more total hedge funds there are, the less the probability of survival; and that leverage has little impact on chances for survival. The second, by Fabrice Rouah of McGill University, confirms the results of the BoJ study. It found, among other things, that: Funds that have stopped reporting performance figures generally have good returns and a large asset base and resemble live funds more than liquidated funds; returns volatility is a more crucial indicator of fund liquidation than any other exit types; and survivorship bias is much higher when only liquidated funds are used to define the pool of dead funds. The McGill study found that, while hedge fund lifetimes depend on several predictor variables, expected lifetimes are about twice as long when liquidation is isolated, rather than when exits are aggregated.