Unobserved performance of hedge funds

Document Type:	Conference presentation
Year of publication:	2019
Conference title:	Fifth Conference on “Recent Advances in Mutual Fund and Hedge Fund Research”
Location of the conference venue:	Berlin, Germany
Date of the conference:	19.-20.08.2019
Publication language:	English
Institution:	Business School > Internat. Finanzierung (Ruenzi 2009-)
Subject:	330 Economics
Abstract:	We investigate hedge funds’ unobserved performance (UP), measured as the risk-adjusted return difference between a fund firm’s reported return and the hypothetical portfolio return derived from its disclosed long equity holdings. We find that high UP is (i) positively associated with measures of managerial incentives, discretion, and skill, and (ii) driven by a fund firm’s frequent trading in equity positions, derivatives usage, short selling, and confidential holdings. Fund firms with high UP outperform fund firms with low UP by more than 6% p.a. after accounting for typical hedge fund risk factors and fund characteristics.