Estimating operational risk for hedge funds: The w-score

Stephen Jeffrey Brown, William N Goetzmann, Bing Liang, Christopher Schwarz

Research output: Contribution to journalArticleResearchpeer-review


Using a complete set of U.S. SEC filing information on hedge funds (Form ADV) and data from the Upper TASS Hedge Fund Database, the study reported here developed a quantitative model called the co-score to measure hedge fund operational risk. The co-score is related to conflict-of- interest issues, concentrated ownership, and reduced leverage in the Form ADV data. With a statistical methodology, the study further related the w-score to such readily available information as fund performance, volatility, size, age, and fee structures. Finally, the study demonstrated that although operational risk is more significant than financial risk in explaining fund failure, a significant and positive interaction exists between operational risk and financial risk.
Original languageEnglish
Pages (from-to)43 - 53
Number of pages11
JournalFinancial Analysts Journal
Issue number1
Publication statusPublished - 2009
Externally publishedYes

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