Academic study examines why some hedge funds appear to be fudging valuations

Unlike mutual funds, the reporting requirements of hedge funds, particularly offshore hedge funds, mean that managers often have a significant amount of discretion with regard to valuing their portfolios.  So do some hedge fund managers take advantage of this and fudge returns?  Researchers have uncovered several clues that suggest they do.  Regular readers will recall this study, for example, showing that there is an odd lack of slightly-negative returns in the per formance history of hedge funds.  It’s almost as if managers exercised some “flexibility” in valuing their portfolios in order to nudge their returns above zero.  For those managers, the benefits of not have a minus sign in front of their return outweighs the costs.

But what is the mechanism that leads to this anomaly and others like it?  Do managers just goose the returns they report to databases and clients or it is more complicated?  A new study explores how exactly “misreporting” occurs.  Instead of looking for statistical anomalies in reported fund returns, Gjergji Cici of the College of William and Mary and Alexander Kempf & Alexander Puetz of the University of...

Article taken from AllAboutAlpha: Hedge Fund Trends & Alternative Investment Analysis - http://allaboutalpha.com/blog
URL to article: http://allaboutalpha.com/blog/2010/09/12/academic-study-examines-why-some-hedge-funds-appear-to-be-fudging-valuations/