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

70 Pages Posted: 21 Apr 2016 Last revised: 21 Jun 2021

See all articles by Sergiy Gorovyy

Sergiy Gorovyy

Ellington Management Group

Patrick J. Kelly

The University of Melbourne

Olga Kuzmina

New Economic School (NES); London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Date Written: January 21, 2021

Abstract

Using a novel measure of own-investor secrecy, we find that non-disclosure to a fund's own investors, unlike non-disclosure to 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

Suggested Citation

Gorovyy, Sergiy and Kelly, Patrick J. and Kuzmina, Olga, Does Secrecy Signal Skill? Own-investor Secrecy and Hedge Fund Performance (January 21, 2021). Available at SSRN: https://ssrn.com/abstract=2766958 or http://dx.doi.org/10.2139/ssrn.2766958

Sergiy Gorovyy

Ellington Management Group ( email )

53 Forest Avenue
Ellington Management Group
Old Greenwich, CT CT 06870
United States

Patrick J. Kelly (Contact Author)

The University of Melbourne ( email )

The University of Melbourne
Faculty of Business and Economics
Melbourne, Victoria 3010 3010
Australia

Olga Kuzmina

New Economic School (NES) ( email )

45 Skolkovskoe shosse
Moscow, Moscow 121353
Russia

HOME PAGE: http://pages.nes.ru/okuzmina/

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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