We investigate hedge funds’ unobserved performance (UP), measured as the risk-adjusted alpha of the difference between a fund firm’s reported return and the hypothetical portfolio return derived from its disclosed long equity holdings. Fund firms with high UP outperform fund firms with low UP by more than 6% p.a. after accounting for typical hedge fund risk factors and fund characteristics. In particular, UP predicts future performance better than past fund performance or past performance derived from long equity positions. We find that high UP is (i) positively associated with measures of managerial incentives, discretion, and skill, and (ii) driven by a fund firm’s frequent trading in equity positions, derivative usage, short selling, and confidential holdings.
Florian Weigert is an Assistant Professor in Finance at the University of St. Gallen, Switzerland. His research interests lie in the area of hedge funds, mutual funds, empirical asset pricing, and behavioral finance. Florian received his Ph.D. in Finance from the University of Mannheim in 2013 and was a visiting scholar at the University of Texas at Austin, Georgia State University, and Georgetown University. He has published scientific articles, among others, in the Journal of Financial Economics, the Review of Finance, and the Journal of Financial & Quantitative Analysis.
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