Discretion, Managerial Incentives, and Market Conditions: The Misreporting of Hedge Fund Returns Public Deposited

Downloadable Content

Download PDF
Last Modified
  • March 21, 2019
  • Green, Jeremiah R.
    • Affiliation: Kenan-Flagler Business School
  • In this study, I document patterns in hedge fund returns that suggest that reporting manipulation is significant and pervasive for hedge funds with discretion in valuing their portfolios of illiquid assets. I show that hedge funds with such discretion report Sharpe ratios that are twice as large as do funds without discretion. I document that manipulation extends beyond the small-loss-to-small-gain kink in the pooled distribution of hedge fund returns to the shoulders and tails of the distribution. I also find that contractual incentives are associated with a larger likelihood of reporting small gains and less extreme returns. Finally, I show that funds with the most discretion report monthly returns that are on average 0.8% higher than funds without discretion. During market downturns, the difference in reported returns between funds with and without discretion increases to 1.3%. These findings bear on the current debates regarding hedge fund regulation, standard-setting for fair-value accounting, and the role of information during market crises.
Date of publication
Resource type
Rights statement
  • In Copyright
  • Hand, John
  • Open access

This work has no parents.