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Unobserved performance of hedge funds

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  • Agarwal, Vikas
  • Ruenzi, Stefan
  • Weigert, Florian

Abstract

We investigate hedge fund firms' unobserved performance (UP), measured as the riskadjusted return difference between a fund firm's reported return and hypothetical portfolio return derived from its disclosed long equity holdings. Fund firms with high UP outperform those with low UP by 7.2% p.a. after accounting for typical hedge fund risk factors. In a horse-race, UP better forecasts fund performance than other predictors. We find that UP is positively associated with a fund firm's intraquarter trading in equity positions, derivatives usage, short selling, and confidential holdings. UP exhibits significant persistence but investors do not yet use it for manager selection.

Suggested Citation

  • Agarwal, Vikas & Ruenzi, Stefan & Weigert, Florian, 2020. "Unobserved performance of hedge funds," CFR Working Papers 20-07, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:2007
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    Cited by:

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    2. Turan G. Bali & Florian Weigert, 2018. "Have Hedge Funds Solved the Idiosyncratic Volatility Puzzle?," Working Papers on Finance 1827, University of St. Gallen, School of Finance.
    3. Hendriock, Mario, 2020. "Implied cost of capital and mutual fund performance," CFR Working Papers 20-11, University of Cologne, Centre for Financial Research (CFR).
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    More about this item

    Keywords

    Hedge fund skill; Confidential Holdings; Derivative Usage; Short Selling; Unobserved Performance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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