Factors that affect the performance of distressed securities hedge funds

Abstract

We present a four factor model to replicate distressed securities hedge fund returns. The model considers the returns of short put options, a short straddle on bonds, the spread between high yield and Treasury bonds, and stocks with small market capitalization. On the basis of this model, we conduct a multivariate analysis of how fund characteristics affect risk-adjusted performance. A high-water mark and performance-based compensation are positively related to risk-adjusted performance, which is in line with much of the hedge fund literature. In contrast to other work, however, we find that lock-up is negatively related to performance and that fund age is unrelated to performance. Our work provides a better understanding of the nature and critical factors for the success of distressed securities hedge funds.

The Impact of the Coronavirus Pandemic on Global Hedge Funds

“…However, the positive and negative returns of hedge funds and the strategies of hedge fund managers are also inextricably linked rather than completely linked to the market economy. It is undeniable that during the coronavirus pandemic, the global economic downturn has had a non-negligible impact on the hedge fund market [6].…”