Does Secrecy Signal Skill? Characteristics and Performance of Secretive Hedge Funds

Abstract

Using a proprietary database that tracks secrecy with respect to a hedge fund's own investors, we find few benefits to own-investor secrecy. These findings contrast with research on secrecy regarding public disclosure. Secretive funds do not outperform transparent funds, and significantly underperform their strategy-matched peers through the financial crisis, consistent with secretive funds loading on unmeasured risks, but inconsistent with own-investor secrecy signalling skill. Though no different in terms of portfolio concentration and leverage, secretive funds are larger, less liquid, more complex, and more likely to file 13F disclosures and request confidential treatment from those disclosures. Secretive funds have lower flow-to-performance sensitivity, even controlling for illiquidity, suggesting that investors do view secretive and transparent funds differently.

Keywords: Disclosure, Hedge Funds, risk premia, Secrecy, transparency

JEL Classification: G01, G11, G23, G32