Unobserved Performance of Hedge Funds
University of St.Gallen, School of Finance Research Paper No. 2018/25
Journal of Finance, Forthcoming
73 Pages Posted: 28 Dec 2018 Last revised: 6 Sep 2023
Date Written: September 03, 2023
Abstract
We investigate hedge fund firms’ unobserved performance (UP), measured as the risk-adjusted return difference between a firm’s reported gross return and its portfolio return inferred from its disclosed long-equity holdings. Firms with high UP outperform those with low UP by 6.36% p.a. on a risk-adjusted basis. UP is negatively associated with a firm’s trading costs and positively associated with intraquarter trading in equity positions, derivatives usage, short selling, and confidential holdings. We show that limited investor attention can delay investors’ response to UP and lead to longer-lived predictability of fund firm performance.
Keywords: Hedge Fund Skill, Confidential Holdings, Derivative Usage, Short Selling, Unobserved Performance
JEL Classification: G11, G23
Suggested Citation: Suggested Citation