Unobserved Performance of Hedge Funds

73 Pages Posted: 28 Dec 2018 Last revised: 6 Sep 2023

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: 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

Agarwal, Vikas and Ruenzi, Stefan and Weigert, Florian, Unobserved Performance of Hedge Funds (September 03, 2023). University of St.Gallen, School of Finance Research Paper No. 2018/25, Journal of Finance, Forthcoming, 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) ( email )

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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