In this paper, we closely examine hedge fund
disclosures to these publicly available databases, and provide empirical
evidence to underpin the current debate on hedge fund disclosure
regulation. We are particularly interested in whether these voluntary
disclosures by hedge funds are reliable guides to their past
performance. We attempt to answer this question by tracking changes to
statements of performance in these databases recorded at different
points in time between 2007 and 2011. In each “vintage” of these
databases,
hedge funds provide information on their performance from the time they
began reporting to the database until the most recent period. We find
evidence that, in successive vintages of these databases, older
performance records (going as far back as 15 years) of hedge funds are
routinely revised. This behavior is widespread: 49% of the 12,128 hedge
funds in our sample revised their previous returns by at least 0.01% at
least once, nearly 30% of funds revised a previous monthly return by at
least 0.5%, and over 20% revised a previous monthly return by at least
1%. These are very substantial changes, comparable to or exceeding the
average monthly return in our sample period of 0.62%.
While
positive revisions are also commonplace, negative revisions are more
common and larger when they occur, that is, on average, initially
provided returns present a more rosy picture of hedge fund performance
than final performance figures. This suggests that prospective investors
could be wooed into making decisions based on initially reported
histories that are then subsequently revised. Moreover, the revisions
are not random. Indeed, we find that information on the characteristics
and past performance of hedge funds can predict their propensity to
revise. For example, funds-of-hedge-funds and hedge funds in the
Emerging Markets style are significantly more likely to revise their
histories of returns than Managed Futures funds. Larger funds, more
volatile funds, and less liquid funds are also more likely to revise.
Several
characteristics of revising funds suggest the nature of incentives that
may drive revising behavior. For example, a fund experiencing a change
in management company or manager is 10% more likely to revise its past
returns, holding all else constant. Following such events, we
hypothesize that new management might be interested in a “fresh start,”
revamping the accounting, marking-to-market, auditing, and compliance
practices of their newly acquired funds, thus resulting in a sequence of
revisions to past returns.Another important characteristic associated with revising behavior is
the presence of a high-water mark in the fund. Managers may have greater
incentives to revise past returns downwards (or simply to
correct previous valuation errors only in the positive direction) when
they are well below their high-water marks, so as to reset the level at
which they begin earning performance fees. Consistent with this
explanation, we find that funds with a high-water mark are 13% more
likely to revise than those without a high-water mark. Moreover, when
funds with a high-water mark revise returns, their average return
revision is −62 basis points. In contrast, funds without a high-water
mark provision have average return revisions of +40 basis points. This
allows for a refinement of our finding that the unconditional average
return revision is negative: funds with an incentive to revise returns
below high-water marks revise downwards on average, whereas funds without high-water marks revise returns upwards, making past returns appear higher in subsequent revisions.
[...]
Fonte: PATTON, A. J., RAMADORAI, T. and STREATFIELD, M. (2015), Change You Can
Believe In? Hedge Fund Data Revisions. The Journal of Finance,
70: 963–999. doi: 10.1111/jofi.12240
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