Strategic Delays and Clustering in Hedge Fund Reported Returns
50 Pages Posted: 15 Aug 2011 Last revised: 4 Jun 2013
Date Written: June 4, 2013
We use a novel database to study the timeliness of hedge fund managers' voluntary disclosures of monthly fund returns. We show that funds disclose returns at a much slower rate when performance is poor. Funds often release the returns of two or more months together in clusters. These clusters exhibit poor returns in the initial months, followed by a strong performance reversal, suggesting a type of “performance smoothing”. We posit that a fund's propensity to be untimely in reporting returns could be indicative of underlying operational risk and poor management. Consistent with this, a portfolio strategy that buys (sells) hedge funds with historically timely (untimely) return reporting delivers style-adjusted returns of 4% per annum. Investor capital flows are significantly lower and less performance-sensitive following reporting delays; fund managers tend to benefit from delayed disclosure when their performance is sufficiently poor. We conclude that the timeliness of disclosure is an important consideration for hedge fund managers and investors.
Keywords: disclosure, hedge funds, clustering, return smoothing
JEL Classification: G14, G23
Suggested Citation: Suggested Citation