Strategic Delays and Clustering in Hedge Fund Reported Returns

Abstract

We use a novel database to study timeliness of hedge-fund monthly performance disclosures. Managers engage in strategic timing: poor monthly returns are reported with delay, sometimes clustered with stronger subsequent performance, suggestive of ‘performance smoothing’. We posit that propensity to delay could reveal operational-risk and/or poor-managerial quality. Consistent with this, a portfolio strategy that buys (sells) funds with historically timely (untimely) reporting delivers 3% annual-style-adjusted returns. Investor flows are lower following reporting delays, though there are potential benefits to managers from delaying when performance is sufficiently poor. We conclude timely disclosure is an important consideration for hedge-fund managers and investors.

Keywords: hedge funds, smoothing, clustering, strategic delay, disclosure

JEL Classification: D82, G14, G23, G30, M41