Return Smoothing, Liquidity Costs, and Investor Flows: Evidence from a Separate Account Platform

Charles Cao (), Grant Farnsworth (), Bing Liang () and Andrew Lo ()
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Charles Cao: Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802
Grant Farnsworth: Neeley School of Business, Texas Christian University, Fort Worth, Texas 76109; and Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802
Bing Liang: Isenberg School of Management, University of Massachusetts Amherst, Amherst, Massachusetts 01103

Management Science, 2017, vol. 63, issue 7, 2233-2250

Abstract: We use a new hedge fund data set from a separate account platform to examine (1) how much of hedge fund return smoothing is due to main fund–specific factors, such as managerial reporting discretion and (2) the costs of removing hedge fund share restrictions. These accounts trade pari passu with matching hedge funds but feature third-party reporting and permissive share restrictions. We use these properties to estimate that 33% of reported smoothing is due to managerial reporting methods. The platform’s fund-level liquidity is associated with a 1.7% performance reduction on an annual basis. Investor flows chase monthly past performance on the platform but not in the associated funds.

Keywords: hedge funds; separate accounts; return smoothing; share restrictions (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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