Unobserved Performance of Hedge Funds

77 Pages Posted: 28 Dec 2018 Last revised: 16 Apr 2020

See all articles by Vikas Agarwal

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Stefan Ruenzi

University of Mannheim - Department of International Finance

Florian Weigert

University of Neuchatel - Institute of Financial Analysis; University of Cologne - Centre for Financial Research (CFR)

Date Written: April 16, 2020

Abstract

We investigate hedge fund firms’ unobserved performance (UP), measured as the risk-adjusted return difference between a fund firm’s reported return and hypothetical portfolio return derived from its disclosed long equity holdings. Fund firms with high UP outperform those with low UP by 7.2% p.a. after accounting for typical hedge fund risk factors. In a horse-race, UP better forecasts fund performance than other predictors. We find that UP is positively associated with a fund firm’s intraquarter trading in equity positions, derivatives usage, short selling, and confidential holdings. UP exhibits significant persistence but investors do not yet use it for manager selection.

Keywords: Hedge Fund Skill, Confidential Holdings, Derivative Usage, Short Selling, Unobserved Performance

JEL Classification: G11, G23

Suggested Citation

Agarwal, Vikas and Ruenzi, Stefan and Weigert, Florian, Unobserved Performance of Hedge Funds (April 16, 2020). University of St.Gallen, School of Finance Research Paper No. 2018/25, Available at SSRN: https://ssrn.com/abstract=3288468 or http://dx.doi.org/10.2139/ssrn.3288468

Vikas Agarwal

Georgia State University ( email )

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Atlanta, GA 30303-3083
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HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Stefan Ruenzi

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

Florian Weigert (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

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