Are hedge fund managers systematically misreporting? Or not?

Philippe Jorion and Christopher Schwarz

Journal of Financial Economics, 2014, vol. 111, issue 2, 311-327

Abstract: A discontinuity, or kink, at zero in the hedge fund net return distribution has been interpreted as evidence of managers manipulating returns to avoid showing small losses. Instead, we propose alternative explanations for this phenomenon. In particular, we show that incentive fees can mechanistically create a kink in the net return distribution. This mechanism accounts for almost the entire kink observed in the large, liquid Long-Short Equity style. Furthermore, we show that asset illiquidity and the bounding of yields at zero can generate distribution discontinuities as well. Therefore, we conclude that the observed hedge fund return discontinuities are not direct proof of manipulation.

Keywords: Hedge funds; Performance evaluation; Valuation; Risk (search for similar items in EconPapers)
JEL-codes: G11 G23 G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:111:y:2014:i:2:p:311-327

DOI: 10.1016/j.jfineco.2013.10.001

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