Unsmoothing Returns of Illiquid Funds

Spencer J. Couts, Andrei S. Goncalves and Andrea Rossi
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Spencer J. Couts: U of Southern California
Andrei S. Goncalves: Ohio State U
Andrea Rossi: U of Arizona

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Funds that invest in illiquid assets report returns with spurious autocorrelation. Consequently, investors need to unsmooth returns when evaluating the risk exposures of these funds. We show that funds investing in similar assets have a common source of spurious autocorrelation, which is not addressed by commonly-used unsmoothing methods, leading to underestimation of systematic risk. To address this issue, we propose a generalization of these unsmoothing techniques and apply it to hedge funds and commercial real estate funds. Our empirical results indicate our method significantly improves the measurement of risk exposures and risk-adjusted performance, with stronger results for more illiquid funds.

JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2023-10
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2024-02

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