Long on returns, short on truth: those little white hedge fund lies

Discussion in 'Professional Trading' started by ASusilovic, Nov 25, 2007.

  1. Via All About Alpha, here are some interesting graphics from two US professors, Nicolas Bollen of Vanderbilt and Veronika Pool of Indiana University. Their paper in full - Do Hedge Fund Managers Misreport Returns? - is available here.

    Around 10 per cent of hedge fund managers tweak their monthly results, according to the research. It seems that an analysis of the statistics throws up some curious anomalies - loads of hedge funds seem to be having marginally good months, but no one seems to be having marginally bad ones. Are they telling little white hedgie lies?

    In the wake of the sub-prime mortgage crisis, hedge fund managers who hold illiquid fixed income securities can manage returns by opportunistically selecting favorable broker quotes. Further, as described by Skeel and Partnoy (2007), credit sensitive securities such as collateralized debt obligations can be so complex, and so reliant on subjective inputs, that model values are prone to manipulation.

    Maybe then, there’s also a degree of group think here - if everyone’s marking to model, what’s the harm in us doing it?

    Consider this graph of average monthly returns, compiled from the comprehensive CISDM database. According to the profs, you’d expect a normal distribution. But lo and behold:


    There’s a curious - and very obvious - skew. Right around the 0 per cent mark, the distribution jumps. Way more funds report reasonably good results than report reasonably bad.

    And just in case there was any doubt (maybe the genius of hedge funds lies in that remarkable zero point phase transition) take a look what happens to the average reporting of results in audit months:


    The “smoothness” of the distribution curve snaps right back in audit months - and widens when the fund managers are unwatched. In other words, hedge fund managers seem to be tweaking their returns. Says the research, 10 per cent of hedge funds in the CISDM database are statistically “distorted”.

    Compare the results across hedge fund strategies and it becomes even clearer that the “distortion” is human. In strategies where managers have little latitude - such as market neutral portfolios - the distribution is more normal.

    Hum...my calculator seems to be not calibrated...:D :D :D
  2. fxpip


    liars everywhere ..
  3. No, no...just "risk-adjusted performance optimization"...Ha, ha, ha...:D :D :D
  4. > 90% of hedge funds are designed to be pure "skimming operations"...
    With no legit plan to outperform the markets.

    Start 100 funds...
    And you get 2% of all assets...
    And 20% of all profits...
    And just fold the losers.

    Like gold stocks... it's all about the STORY.

    We got Rocket Scientist Nobel Prize Winners On Steroids...
    We got Hot and Cold Neural Nets...
    We got Sub-Nanosecond Black Boxes that will give you Multiple Explosive Algorithms...
    On and On.

    Stupid Rich People Can't Get Enough.