Strategic Delays and Clustering in Hedge Fund Reported Returns

Abstract

We use a novel database to study the timeliness of hedge fund monthly performance disclosures. Managers engage in strategic timing: poor monthly returns are reported with delay, sometimes clustered with stronger subsequent performance, suggestive of "performance smoothing." We posit that propensity to delay could reveal operational risk and/or poor managerial quality. Consistent with this, a portfolio strategy that buys (sells) funds with historically timely (untimely) reporting delivers 3% annual-style-adjusted returns. Investor flows are lower following reporting delays, although there are potential benefits to managers from delaying reporting when performance is sufficiently poor. We conclude that timely disclosure is an important consideration for hedge fund managers and investors.

Importance Weights of Performance Ratios: Analyzing Hedge Funds by Entropy Method

“…Some hedge funds distort monthly returns to avoid reporting losses (Bollen and Pool (2009), opportunistically inflate their returns to increase the performance fee, and show the December return high (Agarwall et al 2011). Moreover, hedge funds tend to be strategic in the timing of disclosures to public databases, delaying reporting underperformance, and they are found to expect to offset lower returns with better returns in the following months (Aragon and Nanda 2017).…”

A Model for Estimating Daily Hedge Fund Net Asset Value

“…If fund managers smooth returns less intensively, then reported volatility would increase and Sharpe ratios would decrease. Aragon and Nanda (2017) study the timeliness of hedge fund monthly performance disclosures and conclude that timely disclosure is an important consideration for hedge fund managers and investors. Barth et al (2021) estimate that the worldwide net assets under hedge fund management is larger than the most generous estimate and show that the total returns earned by funds that report to the public databases are significantly lower than the returns of funds that report only on regulatory filings.…”