Unobserved Performance of Hedge Funds

62 Pages Posted: 28 Dec 2018 Last revised: 19 Mar 2019

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 St. Gallen - School of Finance

Date Written: December 1, 2018

Abstract

We investigate hedge funds’ unobserved performance (UP), measured as the risk-adjusted return difference between a fund firm’s reported return and the hypothetical portfolio return derived from its disclosed long equity holdings. We find that high UP is (i) positively associated with measures of managerial incentives, discretion, and skill, and (ii) driven by a fund firm’s frequent trading in equity positions, derivatives usage, short selling, and confidential holdings. Fund firms with high UP outperform fund firms with low UP by more than 6% p.a. after accounting for typical hedge fund risk factors and fund characteristics.

Keywords: Confidential Holdings, Derivative Usage, Discretion, Frequent Trading, Hedge Funds, Managerial Incentives, Short Selling, Unobserved Performance

JEL Classification: G11, G23

Suggested Citation

Agarwal, Vikas and Ruenzi, Stefan and Weigert, Florian, Unobserved Performance of Hedge Funds (December 1, 2018). 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 )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

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 St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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