The Risk of Emerging Hedge Fund Managers

Abstract

This study analyzes the risk profile of emerging hedge funds and managers using a clean definition of age that is not affected by backfill bias. Emerging funds and managers have particularly strong financial incentives to create investment performance but, because of the concavity of performance fees, may also have incentives to assume greater risk. We find that the typical fund volatility, whether adjusted for the sector or not, tends to be higher in the early years. This result, however, is entirely driven by the sample of dead funds. We also find that funds that belong to a multi-fund family tend to have less risk, as do funds run by managers who have previously run another hedge fund. Both findings confirm the importance of reputation effects. Finally, we find that smaller funds have higher risk and greater attrition.

TOPICS: Risk management, mutual fund performance, volatility measures