Are Hedge Fund Managers Systematically Misreporting? Or Not?

42 Pages Posted: 8 Mar 2010 Last revised: 11 Aug 2013

See all articles by Philippe Jorion

Philippe Jorion

University of California, Irvine - Paul Merage School of Business

Christopher Schwarz

University of California at Irvine

Date Written: July 27, 2013

Abstract

A discontinuity, or kink, at zero in the hedge fund net return distribution has been interpreted as evidence of managers manipulating returns to avoid showing small losses. Instead, we propose alternative explanations for this phenomenon. In particular, we show that incentive fees can mechanistically create a kink in the net return distribution. This mechanism accounts for almost the entire kink observed in the large, liquid Long-Short Equity style. Furthermore, we show that asset illiquidity and the bounding of yields at zero can generate distribution discontinuities as well. Therefore, we conclude that the observed hedge fund return discontinuities are not direct proof of manipulation.

Keywords: Hedge Funds, Performance Evaluation, Valuation, Risk

JEL Classification: G11, G23, G32

Suggested Citation

Jorion, Philippe and Schwarz, Christopher, Are Hedge Fund Managers Systematically Misreporting? Or Not? (July 27, 2013). Available at SSRN: https://ssrn.com/abstract=1566978 or http://dx.doi.org/10.2139/ssrn.1566978

Philippe Jorion (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Campus Drive
Irvine, CA 92697-3125
United States
949-824-5245 (Phone)
949-824-8469 (Fax)

Christopher Schwarz

University of California at Irvine ( email )

Irvine, CA 92697-3125
United States

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