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

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Andros Gregoriou

2

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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

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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.

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BECAM ET AL.

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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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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