Do Hedge Funds Manage Their Reported Returns?

The Review of Financial Studies, Forthcoming

59 Pages Posted: 16 Mar 2006 Last revised: 8 Jan 2011

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Naveen D. Daniel

Drexel University - Department of Finance

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Date Written: November 15, 2010

Abstract

For funds with greater incentives and greater opportunities to inflate returns, we find that (i) returns during December are significantly higher than those during the rest of the year even after controlling for risk in both time-series and the cross-section; (ii) this December spike is greater than that for funds with lower incentives and opportunities to inflate returns. These results suggest that hedge funds manage their returns upwards in an opportunistic fashion in order to earn higher fees. Finally, we provide strong evidence that funds inflate December returns by under-reporting returns earlier in the year but only weak evidence that funds borrow from January returns in the following year.

Keywords: Hedge Funds, Incentives, Returns Management, December effect

JEL Classification: G10, G19, G23

Suggested Citation

Agarwal, Vikas and Daniel, Naveen D. and Naik, Narayan Y., Do Hedge Funds Manage Their Reported Returns? (November 15, 2010). The Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=891169

Vikas Agarwal (Contact Author)

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

Naveen D. Daniel

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-5858 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://lebow.drexel.edu/Faculty/DanielN

Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

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