Does size matter in predicting hedge funds' liquidation?

• 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 1 Liquidation 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 Funds Small Funds Medium Funds Large Funds

Year Liquidated Total %Liquidated Liquidated Total %Liquidated Liquidated Total %Liquidated Liquidated Total %Liquidated

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

1995 0 69 0.0000 0 32 0.0000 0 35 0.0000 0 9 0.0000

1996 4 166 2.4096 3 79 3.7975 1 86 1.1628 0 17 0.0000

1997 4 290 1.3793 3 132 2.2728 1 164 0.6097 0 36 0.0000

1998 21 443 4.7404 14 205 6.8293 5 237 2.1097 2 63 3.1746

1999 22 539 4.0816 20 233 8.5837 2 321 0.6230 0 79 0.0000

2000 29 587 4.9404 21 225 9.3333 6 358 1.6760 2 122 1.6393

2001 16 913 1.7525 10 278 3.5971 6 557 1.0772 0 208 0.0000

2002 36 1081 3.3302 19 355 5.3521 16 665 2.4060 1 234 0.4273

2003 51 1209 4.2184 28 402 6.9652 22 737 2.9851 1 295 0.3390

2004 62 1365 4.5421 40 413 9.6852 21 769 2.7308 1 372 0.2688

2005 82 1547 5.3006 40 462 5.6580 39 869 4.4879 3 447 0.6711

2006 52 1536 3.3854 34 423 8.0378 17 842 2.0190 1 484 0.2066

2007 45 1529 2.9431 23 377 6.1008 18 818 2.2005 4 555 0.7207

2008 103 1485 6.9360 49 454 10.7929 47 859 5.4715 7 500 1.4000

2009 72 1325 5.4340 44 452 9.7345 23 781 2.9449 5 340 1.4706

2010 77 1341 5.7420 43 411 10.4623 32 762 4.1995 2 330 0.6061

2011 79 1175 6.7234 35 351 9.9715 39 677 5.7607 5 303 1.6502

2012 76 1009 7.5322 39 296 13.1757 32 571 5.6042 5 275 1.8182

(Continues)

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TABLE 1 (Continued)

All Funds Small Funds Medium Funds Large Funds

Year Liquidated Total %Liquidated Liquidated Total %Liquidated Liquidated Total %Liquidated Liquidated Total %Liquidated

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

2013 20 856 2.3365 9 210 4.2857 10 480 2.0833 1 262 0.3817

2014 46 755 6.0927 20 182 10.9890 17 404 4.2079 9 244 3.6885

2015 41 627 6.5391 19 160 11.8750 18 327 5.5046 4 204 1.9608

2016 18 517 3.4816 11 134 8.2089 3 262 1.1450 4 185 2.1622

Average 4.2655 7.5321 2.7731 1.0266