Faculty & Research
The School

Are Hedge Funds disclosing reliable information?

In our research, we found that hedge funds routinely revise performance data. After looking over voluntary disclosures of financial information, and tracking these data, we found 12,128 funds, between the years 2007 and 2011, modified past performance disclosures. Some of these modifications were tiny, but around 30% of managers revised past monthly performance by 0.5%, or more.

Our research suggests that funds which revise their performance histories significantly and predictably underperform in the future, relatively to those who have never revised. This suggests that unreliable disclosures constitute a valuable source of information for current and potential investors. 

Research summary

Overall, the paper raises suspicions that managers are making phoney corrections, or pushing legitimate corrections only when it helps them reset high-watermarks, allowing them to earn fees. Consistent with this, we find that selling hedge funds as soon as they revise is a sensible strategy, generating higher returns.

Whether a revising fund's figures go up or down, investors would do simply better by avoiding them. Is there a regulatory solution?  Mandatory disclosures, which are slowly being introduced for some large hedge fund managers by the US regulator are the best option, but as of right now, these disclosures are available to the regulator. They need to be made accessible to current and prospective investors as well. Perhaps predictably, hedge funds lobbied against even mandatory disclosures to the regulator, claiming worries about disclosing trade secrets.

Watch this space...

Research publication - forthcoming

Read current research. 'Change you can believe in? Hedge Fund Data Revisions.' Journal of Finance, (Forthcoming).