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Do Hedge Funds Manage Their Reported Returns?

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

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 24 (2011)
    Issue (Month): 10 ()
    Pages: 3281-3320

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    Handle: RePEc:oup:rfinst:v:24:y:2011:i:10:p:3281-3320

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    Cited by:
    1. Lan, Yingcong & Wang, Neng & Yang, Jinqiang, 2013. "The economics of hedge funds," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(2), pages 300-323.
    2. Serge Darolles & Christian Gouriéroux, 2013. "The Effects of Management and Provision Accounts on Hedge Fund Returns - Part I : The High Water Mark Scheme," Working Papers, Centre de Recherche en Economie et Statistique 2013-22, Centre de Recherche en Economie et Statistique.
    3. Jorion, Philippe & Schwarz, Christopher, 2014. "Are hedge fund managers systematically misreporting? Or not?," Journal of Financial Economics, Elsevier, Elsevier, vol. 111(2), pages 311-327.
    4. Andrew J. Patton & Tarun Ramadorai, 2013. "On the High-Frequency Dynamics of Hedge Fund Risk Exposures," Journal of Finance, American Finance Association, American Finance Association, vol. 68(2), pages 597-635, 04.
    5. Brown, Stephen & Goetzmann, William & Liang, Bing & Schwarz, Christopher, 2012. "Trust and delegation," Journal of Financial Economics, Elsevier, Elsevier, vol. 103(2), pages 221-234.
    6. Agarwal, Vikas & Gay, Gerald D. & Ling, Leng, 2012. "Performance inconsistency in mutual funds: An investigation of window-dressing behavior," CFR Working Papers 11-07 [rev.], University of Cologne, Centre for Financial Research (CFR).
    7. Agarwal, Vikas & Gay, Gerald D. & Ling, Leng, 2013. "Window dressing in mutual funds," CFR Working Papers 11-07 [rev.2], University of Cologne, Centre for Financial Research (CFR).
    8. Cici, Gjergji & Kempf, Alexander & Pütz, Alexander, 2011. "The valuation of hedge funds' equity positions," CFR Working Papers 10-15 [rev.], University of Cologne, Centre for Financial Research (CFR).
    9. Agarwal, Vikas & Gay, Gerald D. & Ling, Leng, 2014. "Window dressing in mutual funds," CFR Working Papers 11-07 [rev.3], University of Cologne, Centre for Financial Research (CFR).

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