Predicting funds of hedge funds attrition through performance diagnostics

The analysis of individual mutual funds survivorship reveals that a model based on the consideration of a wide class of performance measures can be a solid predictor of their disappearance. Given the importance of performance fees, this phenomenon is likely to be all the more relevant for funds of hedge funds. In this analysis, we apply a diagnostics methodology to predict the disappearance of funds of hedge funds from databases, which we consider a sign of their attrition. Our research shows that prediction is also possible for these types of hedge funds, and even that the predictive ability of the model is stronger than for mutual funds.