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Do Hedge Funds Manage Their Reported Returns?Vikas AgarwalGeorgia State University; University of Cologne - Centre for Financial Research (CFR) Naveen D. DanielDrexel University - Department of Finance Narayan Y. NaikLondon Business School - Institute of Finance and Accounting November 15, 2010 The Review of Financial Studies, Forthcoming Abstract: For funds with greater incentives and greater opportunities to inflate returns, we find that (i) returns during December are significantly higher than those during the rest of the year even after controlling for risk in both time-series and the cross-section; (ii) this December spike is greater than that for funds with lower incentives and opportunities to inflate returns. These results suggest that hedge funds manage their returns upwards in an opportunistic fashion in order to earn higher fees. Finally, we provide strong evidence that funds inflate December returns by under-reporting returns earlier in the year but only weak evidence that funds borrow from January returns in the following year.
Number of Pages in PDF File: 59 Keywords: Hedge Funds, Incentives, Returns Management, December effect JEL Classification: G10, G19, G23 Accepted Paper SeriesDate posted: March 16, 2006 ; Last revised: January 8, 2011Suggested CitationContact Information
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