Hedge Funds: Pricing Controls and the Smoothing of Self-Reported Returns
نویسندگان
چکیده
We investigate the extent to which hedge fund managers smooth self-reported returns. In contrast to prior research on the “anomalous” properties of hedge fund returns, we observe the mechanisms used to price the fund's investment positions and report the fund's performance to investors, thereby allowing us to differentiate between asset illiquidity and misreporting-based explanations. We find that funds using less verifiable pricing sources and funds that provide managers with greater discretion in pricing investment positions are more likely to have returns consistent with intentional smoothing. Traditional controls, however, such as removing the manager from the setting and reporting of the fund's net asset value and the use of reputable auditors and administrators, are not associated with lower levels of smoothing. With respect to asset illiquidity versus misreporting, investment style and portfolio characteristics explain 14.0–24.3% of the variation in our smoothing measures, and pricing controls explain an additional 4.1–8.8%, suggesting that asset illiquidity is the major factor driving the anomalous properties of self-reported hedge fund returns. Disciplines Accounting | Business This journal article is available at ScholarlyCommons: http://repository.upenn.edu/accounting_papers/92
منابع مشابه
The Rodney L. White Center for Financial Research Hedge Funds: Pricing Controls and the Smoothing of Self Reported Returns
متن کامل
An econometric model of serial correlation and illiquidity in hedge fund returns
The returns to hedge funds and other alternative investments are often highly serially correlated. In this paper, we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure and smoothed returns. We propose an econometric model of return smoothing and develop estimators for the smoothing profile as well as a smoothing-adjusted Sharpe r...
متن کاملReturn Smoothing, Liquidity Costs, and Investor Flows: Evidence from a Separate Account Platform
We use a new dataset of hedge fund returns from a separate account platform to examine (1) how much of hedge fund return smoothing is due to main-fund specific factors, such as managerial reporting discretion (2) the costs of removing hedge fund share restrictions. These accounts trade pari passu with matching hedge funds but feature third-party reporting and permissive share restrictions. We u...
متن کاملEssays in Capital Markets
This thesis consists of three essays in capital markets. The first essay presents a dynamic asset pricing model with heterogeneously informed agents. Unlike previous research, the general case where differential information leads to the problem of "forecasting the forecasts of others" and to non-trivial dynamics of higher order expectations is studied. In particular, it is proved that the model...
متن کاملWavelet Multiscale Analysis for Hedge Funds: Scaling and Strategies
The wide acceptance of Hedge Funds by Institutional Investors and Pension Funds has led to an explosive growth in assets under management. These investors are drawn to Hedge Funds due to the seemingly low correlation with traditional investments and the attractive returns. The correlations and market risk (the Beta in the Capital Asset Pricing Model) of Hedge Funds are generally calculated usin...
متن کامل