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Unobserved Performance of Hedge Funds

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  • Vikas Agarwal
  • Stefan Ruenzi
  • Florian Weigert

Abstract

We investigate hedge funds’ unobserved performance (UP), measured as the risk-adjusted return difference between a fund firm’s reported return and the hypothetical portfolio return derived from its disclosed long equity holdings. We find that high UP is (i) positively associated with measures of managerial incentives, discretion, and skill, and (ii) driven by a fund firm’s frequent trading in equity positions, derivatives usage, short selling, and confidential holdings. Fund firms with high UP outperform fund firms with low UP by more than 6% p.a. after accounting for typical hedge fund risk factors and fund characteristics.

Suggested Citation

  • Vikas Agarwal & Stefan Ruenzi & Florian Weigert, 2018. "Unobserved Performance of Hedge Funds," Working Papers on Finance 1825, University of St. Gallen, School of Finance.
    • Handle: RePEc:usg:sfwpfi:2018:25
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    Cited by:

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    2. Turan G. Bali & Florian Weigert, 2018. "Have Hedge Funds Solved the Idiosyncratic Volatility Puzzle?," Working Papers on Finance 1827, University of St. Gallen, School of Finance.
    3. Hendriock, Mario, 2020. "Implied cost of capital and mutual fund performance," CFR Working Papers 20-11, University of Cologne, Centre for Financial Research (CFR).
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    5. Gorovyy, Sergiy & Kelly, Patrick J. & Kuzmina, Olga, 2021. "Does secrecy signal skill? Own-investor secrecy and hedge fund performance," Journal of Banking & Finance, Elsevier, vol. 133(C).
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    More about this item

    Keywords

    Confidential Holdings; Derivative Usage; Discretion; Frequent Trading; Hedge Funds; Managerial Incentives; Short Selling; Unobserved Performance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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