Citations (10)



Hedge Funds: Pricing Controls and the Smoothing of Self-Reported Returns

Gavin Cassar


Joseph Gerakos

University of Chicago - Booth School of Business

November 2, 2009

Chicago Booth Research Paper No. 09-43

We investigate the extent to which hedge fund managers smooth self‐reported returns. In contrast with prior research on the “anomalous” properties of hedge fund returns, we observe the mechanisms used to price the fund’s investment positions and report the fund’s performance to investors, thereby allowing us to differentiate between asset illiquidity and misreporting‐based explanations. We find that funds using less verifiable pricing sources and funds that provide managers with greater discretion in pricing investment positions are more likely to have returns consistent with intentional smoothing. Traditional controls, however, such as removing the manager from the setting and reporting of the fund’s net asset value and the use of reputable auditors and administrators are not associated with lower levels of smoothing. With respect to asset illiquidity vs. misreporting, investment style and portfolio characteristics explain 14.0-24.3 percent of the variation in our smoothing measures and pricing controls explain an additional 4.1-8.8 percent, suggesting that asset illiquidity is the major factor driving the anomalous properties of self‐reported hedge fund returns.

Number of Pages in PDF File: 59

Keywords: Hedge Funds, Performance Smoothing, Serial Correlation, Pricing Controls

JEL Classification: G12, G23, M41, M42

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Date posted: November 2, 2009  

Suggested Citation

Cassar, Gavin and Gerakos, Joseph, Hedge Funds: Pricing Controls and the Smoothing of Self-Reported Returns (November 2, 2009). Chicago Booth Research Paper No. 09-43. Available at SSRN: http://ssrn.com/abstract=1498601 or http://dx.doi.org/10.2139/ssrn.1498601

Contact Information

Gavin Cassar
INSEAD ( email )
Boulevard de Constance
77305 Fontainebleau Cedex
HOME PAGE: http://www.insead.edu/facultyresearch/faculty/profiles/gcassar/

Joseph J. Gerakos (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Ave.
Chicago, IL 60637
United States
773-834-6882 (Phone)
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