Hedge funds report far more data than the sector is often given credit for, research has found—but it is often unhelpful to investors.

“Fund managers have incentives to limit disclosure in order to reduce the likelihood that their strategies can be identified and replicated.”In a research paper titled “Hedge Fund Voluntary Disclosure”, authors Gavin Cassar of INSEAD, Joseph Gerakos of the University of Chicago, Jeremiah Green of Pennsylvania State University, and John Hand of the University of North Carolina studied thousands of letters from hedge funds to investors.

“Contrary to the industry’s reputation for opacity,” the authors wrote, “we find that hedge funds voluntarily provide their investors with a wide and rich array of content including data related to current and past performance, fund risk, fund investment positions, forward-looking information about the investment environment, and discussion and attribution of past performance.”

At the same time, there were significant biases within reports, with better-performing funds tending to disclose less information than those generating lower returns. The authors found that good performance was “more likely to be attributed to internal factors, while poor performance is more likely to be attributed to external factors”.

“Riskier funds are reliably less likely to report monthly historical returns, the volatility of returns, the worst month’s performance, downside risk, and Sharpe ratio.”“Fund managers have incentives to limit disclosure to their investors in order to reduce the likelihood that their proprietary strategies can be identified and replicated,” the authors added. This appeared to be an effective strategy, as returns were generally better for funds that communicated less information about their holdings and strategies to investors.

In addition, the authors cast doubt on the widely-held theory that more reporting and disclosure improved investors’ ability to monitor risks and performance, thereby reducing “information asymmetry”.

“We find that riskier funds are reliably less likely to report the distribution of monthly historical returns, the volatility of returns, the worst month’s performance, downside risk, and Sharpe ratio,” the authors stated.

The research also found no overall correlation between the amount of information disclosed to investors and the reporting of performance data to commercial databases.

“We suggest that care should be taken when using the decision to report to a commercial database as a commitment by the hedge fund to voluntarily provide its current investors with adequate disclosure,” the authors said.

The full research can be downloaded here.

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