Risk Spillover among Hedge Funds: The Role of Redemptions and Fund Failures

48 Pages Posted: 16 Nov 2009

See all articles by Benjamin Klaus

Benjamin Klaus

European Central Bank (ECB)

Bronka Rzepkowski

Committee of European Securities Regulators (CESR)

Date Written: November 16, 2009

Abstract

This paper aims at analysing the mortality patterns of hedge funds over the period January 1994 to May 2008. In particular, we investigate the extent to which a spillover of risk among hedge funds through redemptions and failures of other funds has affected the probability of fund failure. We find that risk spillover is significantly related to the failure probability of hedge funds, with the relation being more pronounced for redemptions than for failures of other funds. Hedge funds within the same investment style are adversely affected through both channels of risk spillover. In addition, we find that funds being diversified in assets and geographically have a significantly lower failure probability and are not affected by risk spillover via redemptions.

Keywords: Hedge Funds, Survival Analysis, Risk Spillover, Diversification

JEL Classification: G11, G20, G23, G33

Suggested Citation

Klaus, Benjamin and Rzepkowski, Bronka, Risk Spillover among Hedge Funds: The Role of Redemptions and Fund Failures (November 16, 2009). ECB Working Paper No. 1112, Available at SSRN: https://ssrn.com/abstract=1502467 or http://dx.doi.org/10.2139/ssrn.1502467

Benjamin Klaus (Contact Author)

European Central Bank (ECB) ( email )

Frankfurt
Germany

Bronka Rzepkowski

Committee of European Securities Regulators (CESR) ( email )

11-13 Avenue de Friedland
Paris F-75008
France

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