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Do Hedge Fund Managers Misreport Returns? Evidence from the Pooled Distribution

Authors

  • NICOLAS P.B. BOLLEN,

  • VERONIKA K. POOL

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    • Nicolas Bollen is with the Owen Graduate School of Management at Vanderbilt University and Veronika K. Pool is with Indiana University. The authors thank Cliff Ball, Jim Byrne, Mila Getmansky, Craig Lewis, Bing Liang, Neil Ramsey, Jacob Sagi, Paul Schultz, Fei Xie, and seminar participants at Georgetown University, Indiana University, the University of Massachusetts, Vanderbilt University, and the 2008 WFA annual meeting for helpful discussions. Research support was provided by the Financial Markets Research Center.


ABSTRACT

We find a significant discontinuity in the pooled distribution of monthly hedge fund returns: The number of small gains far exceeds the number of small losses. The discontinuity is present in live and defunct funds, and funds of all ages, suggesting that it is not caused by database biases. The discontinuity is absent in the 3 months culminating in an audit, suggesting it is not attributable to skillful loss avoidance. The discontinuity disappears when using bimonthly returns, indicating a reversal in fund performance following small gains. This result suggests that the discontinuity is caused at least in part by temporarily overstated returns.

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