Unobserved Performance of Hedge Funds
77 Pages Posted: 28 Dec 2018 Last revised: 16 Apr 2020
Date Written: April 16, 2020
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: Suggested Citation