We propose a new measure of hedge fund’s activeness. Our activeness measure is a fund firm’s absolute return wedge defined as the absolute value of a fund firm’s reported return minus its hypothetical portfolio return derived from its disclosed long equity holdings. Fund firms with a high absolute return wedge outperform fund firms with a low absolute return wedge by more than 6% p.a. after accounting for typical risk factors that explain hedge fund performance. We find that the absolute return wedge is positively associated with measures of managerial incentives and discretion. Moreover, fund firms with greater value of long put options and confidential equity positions disclosed with a delay in their regulatory filings show high absolute return wedges. Taken together, these results are consistent with better incentivized hedge fund managers being more active and delivering superior performance.
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