Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T06:03:06.306Z Has data issue: false hasContentIssue false
  • English
  • Français

Conditional Return Smoothing in the Hedge Fund Industry

Published online by Cambridge University Press:  06 April 2009

Nicolas P. B. Bollen  and
Veronika K. Pool
Get access Rights & Permissions [Opens in a new window]

Abstract

We show that if true returns are independently distributed and a manager fully reports gains but delays reporting losses, then reported returns will feature conditional serial correlation. We use conditional serial correlation as a measure of conditional return smoothing. We estimate conditional serial correlation in a large sample of hedge funds. We find that the probability of observing conditional serial correlation is related to the volatility and magnitude of investor cash flows, consistent with conditional return smoothing in response to the risk of capital flight. We also present evidence that conditional serial correlation is a leading indicator of fraud.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 2 , June 2008 , pp. 267 - 298
Copyright
Copyright © School of Business Administration, University of Washington 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ackerman, C.; McEnally, R.; and Ravenscraft, D.. “The Performance of Hedge Funds: Risk, Return, and Incentives.” Journal of Finance, 54 (1999), 833–874.CrossRefGoogle Scholar
Agarwal, V.; Daniel, N. D.; and Naik, N. Y.. “Flows, Performance, and Managerial Incentives in the Hedge Fund Industry.” Working Paper, Georgia State University (2003).Google Scholar
Agarwal, V., and Naik, N. Y.. “Multi-Period Performance Persistence Analysis of Hedge Funds.” Journal of Financial and Quantitative Analysis, 35 (2000), 327–342.CrossRefGoogle Scholar
Agarwal, V., and Naik, N. Y.. “Risks and Portfolio Decisions Involving Hedge Funds.” Review of Financial Studies, 17 (2004), 63–98.CrossRefGoogle Scholar
Anson, M.Handbook of Alternative Assets. New York, NY: John Wiley & Sons (2002).Google Scholar
Aragon, G. “Share Restrictions and Asset Pricing: Evidence from the Hedge Fund Industry.” Working Paper, Boston College (2004).Google Scholar
Asness, C.; Krail, R.; and Liew, J.. “Do Hedge Funds Hedge?” Journal of Portfolio Management, 28 (2001), 6–19.CrossRefGoogle Scholar
Atkins, P. S., and Glassman, C. A.. “Dissent of Commissioners Glassman and Atkins to Proposing Release No. IA-2266.” www.sec.gov/rules/proposed/ia-2266.htm#dissent (2004).Google Scholar
Berk, J., and Green, R.. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy, 112 (2004), 1269–1295.CrossRefGoogle Scholar
Bollen, N. P. B., and Busse, J. A.. “On the Timing Ability of Mutual Fund Managers.” Journal of Finance, 56 (2001), 1075–1094.CrossRefGoogle Scholar
Boudoukh, J.; Richardson, M.; Subrahmanyam, M.; and Whitelaw, R. F.. “Stale Prices and Strategies for Trading Mutual Funds.” Financial Analysts Journal, 58 (2002), 53–71.CrossRefGoogle Scholar
Brown, S. J.; Gallagher, D. R.; Steenbeek, O. W.; and Swan, P. L.. “Double or Nothing: Patterns of Equity Fund Holdings and Transactions.” Working Paper, New York University (2004).Google ScholarPubMed
Brown, S. J.; Goetzmann, W. N.; and Ibbotson, R. G.. “Offshore Hedge Funds: Survival and Performance 1989–95.” Journal of Business, 72 (1999), 91–117.CrossRefGoogle Scholar
Brown, K. C.; Harlow, W. V.; and Starks, L. T.. “Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry.” Journal of Finance, 51 (1996), 85–110.CrossRefGoogle Scholar
Burns, N., and Kedia, S.. “The Impact of Performance-Based Compensation onMisreporting.” Journal of Financial Economics, 79 (2006), 35–67.CrossRefGoogle Scholar
Busse, J. A. “Another Look at Mutual Fund Tournaments.” Journal of Financial and Quantitative Analysis, 36 (2001), 53–73.CrossRefGoogle Scholar
Carhart, M. “On the Persistence of Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chandar, N., and Bricker, R.. “Incentives, Discretion, and Asset Valuation in Closed-End Mutual Funds.” Journal of Accounting Research, 40 (2002), 1037–1070.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G.. “Risk Taking by Mutual Funds as a Response to Incentives.” Journal of Political Economy, 105 (1997), 1167–1200.CrossRefGoogle Scholar
Dimson, E. “Risk Measurement when Shares are Subject to Infrequent Trading.” Journal of Financial Economics, 7 (1979), 197–226.CrossRefGoogle Scholar
Fung, W., and Hsieh, D. A.. “Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds.” Review of Financial Studies, 10 (1997), 275–302.CrossRefGoogle Scholar
Fung, W., and Hsieh, D. A.. “The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers.” Review of Financial Studies, 14 (2001), 313–341.CrossRefGoogle Scholar
Fung, W., and Hsieh, D. A.. “Asset-Based Style Factors for Hedge Funds.” Financial Analysts Journal, 58 (2002), 16–27.CrossRefGoogle Scholar
Fung, W., and Hsieh, D. A.. “Hedge Fund Benchmarks: A Risk Based Approach.” Financial Analysts Journal, 60 (2004), 65–80.CrossRefGoogle Scholar
Getmansky, M.; Lo, A. W.; and Makarov, I.. “An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns.” Journal of Financial Economics, 74 (2004), 529–609.CrossRefGoogle Scholar
Greene, W.Econometric Analysis, 5th ed.Englewood Cliffs, NJ: Prentice Hall (2003).Google Scholar
Jagannathan, R., and Korajczyk, R. A.. “Assessing the Market Timing Performance of Managed Portfolios.” Journal of Business, 59 (1986), 217–235.CrossRefGoogle Scholar
King, G., and Zeng, L.. “Logistic Regression in Rare Events Data.” Working Paper, Harvard University (1999).Google Scholar
Koski, J., and Pontiff, J.. “How are Derivatives Used? Evidence from the Mutual Fund Industry.” Journal of Finance, 54 (1999), 791–816.CrossRefGoogle Scholar
Liu, J., and Longstaff, F. A.. “Losing Money on Arbitrages: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities.” Review of Financial Studies, 17 (2004), 611–641.CrossRefGoogle Scholar
PricewaterhouseCoopers. Investigation into Foreign Exchange Losses at the National Australia Bank, PricewaterhouseCoopers (2004).Google Scholar
Scholes, M., and Williams, J.. “Estimating Betas from Non-Synchronous Data.” Journal of Financial Economics, 5 (1977), 309–327.CrossRefGoogle Scholar
Sharpe, W. F. “Asset Allocation: Management Style and Performance Measurement.” Journal of Portfolio Management, 18 (1992), 7–19.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R.. “The Limits of Arbitrage.” Journal of Finance, 52 (1997), 35–55.CrossRefGoogle Scholar
U.S. Securities and Exchange Commission. Implications of the Growth of Hedge Funds, Washington, DC (2003).Google Scholar
U.S. Securities and Exchange Commission. Registration Under the Advisers Act of Certain Hedge Fund Advisers, Proposed Rule, File No. S7-30-04, Washington, DC (2004).Google Scholar
U.S. Securities and Exchange Commission. Registration Under the Advisers Act of Certain Hedge Fund Advisers, Final Rule, File No. S7-30-04, Washington, DC (2005).Google Scholar
Zitzewitz, E. “Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds.” Journal of Law Economics & Organization, 19 (2003), 245–280.CrossRefGoogle Scholar