Why Do Hedge Funds Avoid Disclosure? Evidence from Confidential 13F Filings

Abstract

We study a sample of Form 13F filings where fund advisors seek confidential treatment for some or all of their 13(f)-reportable positions. Consistent with the hypothesis that managers seek confidentiality to protect proprietary information, we find that confidential positions earn positive and significant abnormal returns over the post-filing confidential period. We also find that managers are more likely to seek confidential treatment of illiquid positions that are more susceptible to front-running. Overall, our analysis highlights important benefits of reduced disclosure that are relevant to the current policy debate on hedge fund transparency.

Mandatory Portfolio Disclosure, Stock Liquidity, and Mutual Fund Performance

“…Other studies examine various responses of institutional investors to mandatory portfolio disclosure. Specifically, institutions can respond by (a) window dressing to mislead investors (e.g., Lakonishok et al (), Musto (, ), Agarwal, Gay, and Ling ()), (b) front‐running their followers (Brown and Schwarz ()), (c) hiding certain positions to maximize the benefits of their private information (Agarwal et al () and Aragon, Hertzel, and Shi ()), and (d) trading strategically within the quarter to minimize the impact of disclosure (Wang () and Puckett and Yan ()). In another study, Ge and Zheng () investigate the determinants and consequences of mutual funds’ decision to voluntarily disclose their portfolio holdings.…”

“…Institutions filing Form 13F can seek confidential treatment on certain portfolio holdings, which, if approved by the SEC, allows them to delay the disclosure by up to one year. See Agarwal et al () and Aragon, Hertzel, and Shi () for details.…”

Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide

“…Despite their potential importance, confidential holdings have not been systematically studied because they are generally not included in the conventional databases of institutional quarterly holdings, such as the Thomson Reuters Ownership Data (formerly the CDA/Spectrum database) 10 . In a contemporaneous paper, Aragon, Hertzel, and Shi (2012) also study hedge funds' use of confidential filings. In addition to having a more comprehensive sample of hedge funds, we conduct more analyses (such as characteristics of heavy users, trading behavior during confidential periods, as well as market reactions to the disclosure of confidential filings) to shed light on the costs and benefits associated with seeking confidentiality.…”

“…In addition to having a more comprehensive sample of hedge funds, we conduct more analyses (such as characteristics of heavy users, trading behavior during confidential periods, as well as market reactions to the disclosure of confidential filings) to shed light on the costs and benefits associated with seeking confidentiality. Aragon, Hertzel, and Shi (2012), on the other hand, link hedge funds' confidential filings to their overall performance at the fund level.…”

Does institutional ownership predict mutual fund performance? An examination of undiscovered holdings within 13(f) reports

“…Studies that investigate the disclosure patterns of institutions mostly focus on their equity positions, which institutions are required to disclose in Form 13(f). Some institutions, especially hedge funds, intend to delay disclosing their equity positions until they reap all profits from their trading strategies (Agarwal, Fos, & Jiang, 2013; Agarwal, Jiang, Tang, & Yang, 2013; Aragon, Hertzel, & Shi, ). Compared with hedge funds’ equity positions, the disclosure of mutual fund positions by institutions is not as relevant.…”