Do Hedge Funds Manage Their Reported Returns?
The Review of Financial Studies, Forthcoming
59 Pages Posted: 16 Mar 2006 Last revised: 8 Jan 2011
Date Written: November 15, 2010
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: Suggested Citation