VERONIKA KREPELY POOL - Indiana University Bloomington - Department of Finance
NICOLAS P.B. BOLLEN - Vanderbilt University - Owen Graduate School of Management
We find a significant discontinuity in the pooled distribution of reported hedge fund returns: the number of small gains far exceeds the number of small losses. The discontinuity is present in live funds, defunct funds, and funds of all ages, suggesting that it is not caused by database biases. The discontinuity is absent in the three months culminating in an audit, funds that invest in liquid assets, and hedge fund risk factors, suggesting that it is generated neither by the skill of managers to avoid losses nor by nonlinearities in hedge fund asset returns. A remaining explanation is that hedge fund managers avoid reporting losses to attract and retain investors.
...Conclusions
This paper documents a robust feature of the pooled cross-sectional, time series distribution of hedge fund returns: a discontinuity exists at zero. The discontinuity is not present during the three months culminating in an audit, in factor returns commonly used to proxy for trading strategies employed by funds, or in subsets of funds that invest in liquid securities. These results suggest that some managers distort returns when possible, e.g. when fund returns are at their discretion and when their reported returns are not closely monitored. The discontinuity is present in both live and defunct funds, indicating that it is not a function of survivorship. The discontinuity persists as funds age. Taken together, our results suggest the purposeful avoidance of reporting losses.
Source :
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1018663
NICOLAS P.B. BOLLEN - Vanderbilt University - Owen Graduate School of Management
We find a significant discontinuity in the pooled distribution of reported hedge fund returns: the number of small gains far exceeds the number of small losses. The discontinuity is present in live funds, defunct funds, and funds of all ages, suggesting that it is not caused by database biases. The discontinuity is absent in the three months culminating in an audit, funds that invest in liquid assets, and hedge fund risk factors, suggesting that it is generated neither by the skill of managers to avoid losses nor by nonlinearities in hedge fund asset returns. A remaining explanation is that hedge fund managers avoid reporting losses to attract and retain investors.
...Conclusions
This paper documents a robust feature of the pooled cross-sectional, time series distribution of hedge fund returns: a discontinuity exists at zero. The discontinuity is not present during the three months culminating in an audit, in factor returns commonly used to proxy for trading strategies employed by funds, or in subsets of funds that invest in liquid securities. These results suggest that some managers distort returns when possible, e.g. when fund returns are at their discretion and when their reported returns are not closely monitored. The discontinuity is present in both live and defunct funds, indicating that it is not a function of survivorship. The discontinuity persists as funds age. Taken together, our results suggest the purposeful avoidance of reporting losses.
Source :
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1018663
