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Do Hedge Funds Manage Their Reported Returns?

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  • Vikas Agarwal
  • Naveen D. Daniel
  • Narayan Y. Naik

Abstract

For funds with high incentives and more opportunities to inflate returns, we find that (i) returns during December are significantly higher than returns during the rest of the year, even after controlling for risk in both the time series and the cross-section; and (ii) this December spike is greater than for funds with lower incentives and fewer opportunities to inflate returns. These results suggest that hedge funds manage their returns upward in an opportunistic fashion in order to earn higher fees. Finally, we find strong evidence that funds inflate December returns by underreporting returns earlier in the year but only weak evidence that funds borrow from January returns in the following year. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Vikas Agarwal & Naveen D. Daniel & Narayan Y. Naik, 2011. "Do Hedge Funds Manage Their Reported Returns?," The Review of Financial Studies, Society for Financial Studies, vol. 24(10), pages 3281-3320.
    • Handle: RePEc:oup:rfinst:v:24:y:2011:i:10:p:3281-3320
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    File URL: http://hdl.handle.net/10.1093/rfs/hhr058
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