Survival of strategic, market defensive, diversified and conservative fund of hedge funds: 1994–2005

Abstract

Fabrice Douglas Rouah is Vice President (Senior Quantitative Analyst) for a large financial firm based in Boston, MA. Practical applicationsThis paper helps institutional investors, pension funds and endowments to identify factors driving funds of hedge funds survival. This is important since funds of hedge funds are often perceived as being less risky than individual hedge funds. The study also sheds light on the behaviour of four different funds of hedge funds sub-strategies. AbstractIn this paper, we investigate the survival lifetimes of fund of hedge funds (FOF) during the January 1994-December 2005 period. We focus on four FOF subcategories tracked in the Hedge Fund Research, Inc. database, and find important differences between the sub-categories in the attrition rates of FOFs. More specifically, using Weibull and Cox proportional hazards models, we find that FOF survival times depend on a number of predictor variables, including a FOF's efficiency score from a data envelopment analysis (DEA) model. We also confirm the fact that FOFs are not a homogeneous group of funds, but rather constitute four distinct management styles.