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http://ssrn.com/abstract=686137
 
 

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A Screen for Fraudulent Return Smoothing in the Hedge Fund Industry


Nicolas P. B. Bollen


Vanderbilt University - Finance

Veronika Krepely Pool


Indiana University - Kelley School of Business - Department of Finance

January 2006


Abstract:     
This paper constructs a statistical screen for fraudulent return smoothing in the hedge fund industry. We show that if true returns are independently distributed, and a manager fully reports gains but delays reporting losses, then reported hedge fund returns will feature conditional serial correlation. Simulation evidence indicates that the power of the screen is restricted by the limited histories of some funds, but may still be sufficient to deter fraudulent return smoothing. Empirical evidence shows that the probability of observing conditional serial correlation is related to the volatility and magnitude of investor cash flows, consistent with managerial smoothing in response to the risk of capital flight.

Number of Pages in PDF File: 51

Keywords: Hedge funds, fraud

JEL Classification: G23, G28

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Date posted: March 18, 2005  

Suggested Citation

Bollen, Nicolas P. B. and Pool, Veronika Krepely, A Screen for Fraudulent Return Smoothing in the Hedge Fund Industry (January 2006). Available at SSRN: http://ssrn.com/abstract=686137 or http://dx.doi.org/10.2139/ssrn.686137

Contact Information

Nicolas P.B. Bollen (Contact Author)
Vanderbilt University - Finance ( email )
401 21st Avenue South
Nashville, TN 37203
United States
HOME PAGE: http://mba.vanderbilt.edu/faculty/nbollen.cfm

Veronika Krepely Pool
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

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