Unobserved Performance of Hedge Funds

67 Pages Posted: 28 Dec 2018 Last revised: 30 Aug 2021

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: August 28, 2021

Abstract

We investigate hedge fund firms’ unobserved performance (UP), measured as the risk-adjusted return difference between a firm’s reported gross return and portfolio return inferred from its disclosed long-equity holdings. Firms with high UP outperform those with low UP by 6.36% p.a. after accounting for typical hedge fund risk factors. UP better forecasts fund performance than other predictors. We find that 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. UP exhibits significant persistence but investors do not seem to 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 (August 28, 2021). 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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HOME PAGE: http://vagarwal.gsucreate.org/

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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