Do Hedge Funds Manage Their Reported Returns?
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
November 15, 2010
The Review of Financial Studies, Forthcoming
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.
Number of Pages in PDF File: 59
Keywords: Hedge Funds, Incentives, Returns Management, December effect
JEL Classification: G10, G19, G23
Date posted: March 16, 2006 ; Last revised: January 8, 2011