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

51 Pages Posted: 16 Jun 2020

See all articles by Sergiy Gorovyy

Sergiy Gorovyy

Ellington Management Group

Patrick J. Kelly

University of Melbourne - Department of Finance

Olga Kuzmina

New Economic School (NES); London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Date Written: June 2020

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

Suggested Citation

Gorovyy, Sergiy and Kelly, Patrick J. and Kuzmina, Olga, Does Secrecy Signal Skill? Characteristics and Performance of Secretive Hedge Funds (June 2020). CEPR Discussion Paper No. DP14873, Available at SSRN: https://ssrn.com/abstract=3628194

Sergiy Gorovyy (Contact Author)

Ellington Management Group ( email )

53 Forest Avenue
Ellington Management Group
Old Greenwich, CT CT 06870
United States

Patrick J. Kelly

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Olga Kuzmina

New Economic School (NES) ( email )

45 Skolkovskoe shosse
Moscow, Moscow 121353
Russia

HOME PAGE: http://pages.nes.ru/okuzmina/

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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