The failure of hedge funds: An analysis of the impact of different risk classes

This article analyses the determinants of hedge fund failure. We investigate, by using a Probit model, the relationship between different groups of variables: returns, risk, size, management, transparency and liquidity. The classes of variables affect the probability of the fund's failure in different ways. We find that the traditional return-risk relation explains 9.68% of the variation of the probability of failure. The results show that dimensional, transparency and liquidity variables, are the best determinants of the probability of hedge fund failure while the management variables record an explanatory power around 11.00%. However, the complete model records a Pseudo-R2 of 54.03%. In addition, the results show differences regarding the probability of fund failure in relation to the investment zones and the investment strategies, while the management provisions do not affect the probability of failure.