Recovering Delisting Returns of Hedge Funds
Final Report Abstract
Numerous hedge funds stop reporting each year to commercial databases. Large institutional investors, such as pension funds, which currently consider including hedge funds into their investment portfolios, face an important performance estimation question: what delisting return to attribute to such hedge funds that disappear from databases? This would be particularly problematic if delisting returns are typically very different from continuing funds’ returns. The common fear is that upon delisting a value of a hedge fund sharply deteriorates that can seriously influence the total position of investors. In the project “Recovering Delisting Returns of Hedge Funds”, these unobserved delisting returns of hedge funds are estimated. We first approximate portfolio holdings for funds of funds which continuously report returns to the commercial databases and then back out estimates for hedge-fund delisting returns. We find that upon delisting, the value of an average hedge fund does not seem to deteriorate considerably. The estimated mean delisting return of 0.24% for all exiting funds is not statistically significantly different from the average monthly return for all reporting hedge funds of 0.82%. Nevertheless, when evaluating risks of the portfolios with hedge funds, an investor should be aware of differences in the exit returns of funds following different strategies. Less liquid funds (for example, the ones focusing on emerging markets) tent to have larger negative delisting returns. Additionally, delisting returns seem to depend on business cycle and are influenced by the typical returns which can be realized in the market. During crises periods one should, thus, expect larger losses in value of delisting hedge funds than during times of stable market conditions.
