Using a complete set of U.S. SEC filing information on hedge funds (Form ADV) and
data from the Lipper TASS Hedge Fund Database, the study reported here developed
a quantitative model called the ω-score to measure hedge fund operational
risk. The ω-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 ω-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.