Does size matter in predicting hedge funds' liquidation?
Author | Adrien Becam,Andros Gregoriou,Jairaj Gupta |
DOI | http://doi.org/10.1111/eufm.12159 |
Published date | 01 March 2019 |
Date | 01 March 2019 |
Eur Financ Manag. 2019;25:271–309. wileyonlinelibrary.com/journal/eufm © 2017 John Wiley & Sons, Ltd.271
DOI: 10.1111/eufm.12159
ORIGINAL ARTICLE
Does size matter in predicting hedge funds'
liquidation?
Adrien Becam
1
|
Andros Gregoriou
2
|
Jairaj Gupta
3
1
Department of Finance, Paris Dauphine
University, Place du Maréchal de Lattre
de Tassigny, 75016 Paris, France
Email: Adrien.Becam@dauphine.eu
2
Department of Finance and Economics,
University of Brighton, Mithras House,
Lewes Road, Brighton, BN2 4AT, UK
Email: A.Gregoriou@brighton.ac.uk
3
Department of Finance, University of
Birmingham, 116 Edgbaston Park Road,
Birmingham, B15 2TY, UK
Email: J.Gupta@outlook.com
Abstract
In this study, we propose a set of covariates that exploit
the information content of hedge funds' relative size,
performance, growth, tail risk and past liquidation rate
in predicting their liquidation. Empirical results show that
our proposed covariates exhibit significant predictive power
for up to two years even when we control for fund specific
characteristics. Furthermore, we estimate separate liquida-
tion prediction models for small, medium and large funds.
Our findings suggest that liquidation likelihood of hedge
funds is inversely related to fund size, and the statistical
significance of factors affecting their liquidation varies
across different size categories.
KEYWORDS
default, failure, fund size, hedge fund, liquidation
JEL CLASSIFICATION
G11, G17, G33
1
|
INTRODUCTION
The hedge fund industry has experienced difficult times recently, with tense global macroeconomic
conditions, high market volatility, enhanced regulatory vigilance and underperformance relative to
traditional asset classes. These factors may have contributed to the closing down of funds at an
increasing rate in recent years (see Table 1). Strikingly, some of the biggest names have also been
The authors are sincerely grateful to the Editor Prof. John A. Doukas, an anonymous referee, and seminar participants at
the 16th Annual European Economics and Finance Society Conference (Ljubljana, 2017) for their insightful comments and
suggestions that improved this paper significantly. This journal requires authors to be listed in alphabetic order. Authors in
descending order of their relative contribution are Jairaj Gupta, Adrien Becam and Andros Gregoriou.
2
|
BECAM ET AL.
B
272
TABLE 1Liquidation rate of hedge funds
This table presents yearly details of liquidated and censored hedge funds. Column (1) lists years followed by number of funds liquidated in that year (column (2)), total number of funds in
the database in that year (column (3)), and percentage of funds liquidated (Liquidated/Total ×100) in that year (column (4)) for our entire sample of hedge funds. Subsequent columns
show similar information for small, medium, and large sized funds. In the last row, ‘Average’is mean of annual liquidation rates reported in columns (4), (7), (10) and (13), respectively.
All FundsSmall FundsMedium FundsLarge Funds
YearLiquidated Total %LiquidatedLiquidated Total %LiquidatedLiquidated Total %LiquidatedLiquidated Total %Liquidated
(1)(2) (3)(4)(5) (6)(7)(8) (9)(10)(11)(12)(13)
19950690.00000320.0000 0350.0000 090.0000
19964 1662.40963793.7975 1861.1628 0170.0000
19974 2901.37933 1322.2728 1 1640.6097 0360.0000
199821 4434.7404 14 2056.8293 5 2372.1097 2633.1746
199922 5394.0816 20 2338.5837 2 3210.6230 0790.0000
200029 5874.9404 21 2259.3333 6 3581.6760 21221.6393
200116 9131.7525 10 2783.5971 6 5571.0772 02080.0000
20023610813.3302 19 3555.352116 6652.4060 12340.4273
20035112094.2184 28 4026.965222 7372.9851 12950.3390
20046213654.5421 40 4139.685221 7692.7308 13720.2688
20058215475.3006 40 4625.658039 8694.4879 34470.6711
20065215363.3854 34 4238.037817 8422.0190 14840.2066
20074515292.9431 23 3776.100818 8182.2005 45550.7207
200810314856.936049454 10.792947859 5.47157500 1.4000
20097213255.4340 44 4529.734523 7812.9449 53401.4706
20107713415.742043411 10.462332762 4.19952330 0.6061
20117911756.7234 35 3519.971539 6775.7607 53031.6502
20127610097.532239296 13.175732571 5.60425275 1.8182
(Continues)
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.BECAM ET AL.
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3
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TABLE 1(Continued)
All FundsSmall FundsMedium FundsLarge Funds
YearLiquidated Total %LiquidatedLiquidated Total %LiquidatedLiquidated Total %LiquidatedLiquidated Total %Liquidated
(1)(2)(3) (4)(5)(6) (7)(8)(9) (10)(11)(12)(13)
201320856 2.336592104.285710480 2.08331262 0.3817
201446755 6.092720182 10.989017404 4.20799244 3.6885
201541627 6.539119160 11.875018327 5.50464204 1.9608
201618 5173.4816 11 1348.2089 3 2621.1450 41852.1622
Average 4.26557.53212.77311.0266
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