The Rich Man's Disease
High hedge fund fees don't buy accurate performance reporting.
For a while, I ran Morningstar's hedge fund database. A grim task that, as hedge funds delight in gaming database providers. Consider one hedge fund that started up in the early 1990s. "Four months later the fund began reporting to a database, and a year after inception it reported assets under management (AUM) in the top quintile of all funds. In the mid 2000s, the fund experienced a troubled quarter and saw its AUM halve in value. It then ceased reporting AUM figures. The fund's performance recovered, and during the last quarter of 2008 it reported a particularly good double digit return, putting it in the top decile of funds. However, a few months later this high return was revised downward significantly, into a large negative return."
The example and quote come from "Change You Can Believe In? Hedge Fund Data Revisions," a working paper by professors at Oxford and Duke. As private entities, hedge funds can pick and choose when reporting to databases. They often report to some databases and not others; they release some data points and not others; and they appear and disappear from the databases on terms that the hedge funds find to be favorable. Worst of all, and the paper's subject: Hedge funds might not report correct performance.
John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.