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Unsmoothing Returns of Illiquid Funds

Author

Listed:
  • Couts, Spencer J.

    (U of Southern California)

  • Goncalves, Andrei S.

    (Ohio State U)

  • Rossi, Andrea

    (U of Arizona)

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.

Suggested Citation

  • Couts, Spencer J. & Goncalves, Andrei S. & Rossi, Andrea, 2023. "Unsmoothing Returns of Illiquid Funds," Working Paper Series 2024-02, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2024-02
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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