Does Secrecy Signal Skill? Own-investor Secrecy and Hedge Fund Performance

Abstract

Using a novel measure of own-investor secrecy, we find that non-disclosure to a fund's own investors, unlike non-disclosure to the public, does not signal hedge fund skill. Own-investor secretive funds do not significantly outperform transparent funds through an up market, and they significantly underperform their (sub)strategy-matched peers through the down market of the Global Financial Crisis. These results are robust to using factor models and controls for fund illiquidity, complexity, concentration, size, and leverage. These patterns are consistent with funds loading on option-like risks, and additional tests show that secretive funds are exposed to risks akin to put-option writing. Measures of skill proposed by prior research also do not suggest secretive funds possess superior skill. Through the up-market portion of our sample, secretive funds have lower flow-to-performance sensitivity, even controlling for illiquidity, suggesting that investors view secretive and transparent funds differently.

Keywords: Hedge funds, Disclosure, Secrecy, Transparency, Risk premia

JEL Classification: G01, G11, G23, G32