Friday, August 31, 2007

Hedge fund managers misreport returns

In an earlier post we asked whether the "2 and 20" compensation system (2% of assets and 20% of profit) aligns the incentive of hedge fund managers with the profit goals of hedge fund owners. Colleague Nick Bollen and his student Veronika Krepely Pool have a working paper (abstract) that finds evidence of earnings manipulation by hedge fund managers to attract investors.

Hedge funds differ from mutual funds in that they are not valued every day. In addition, managers have discretion about how they value the (often illiquid) assets. Because young hedge funds find it easier to attract investors if they do not report negative returns, they choose valuation methods that avoid negative returns. Frequent auditing reduces earnings manipulation.


  1. I like the news, even know I have just read the news now, I became interested to know what is a Hedge fund and what it really means.

  2. I personally prefer to manage things on my own, as that’s far better stuff to do and thanks to great broker like OctaFX, it only helps given the wide range of benefits which includes having low spreads starting from just 0.1 pips to high leverage up to 1.500 plus much more, it all contributes in making things easier for me and allows me to be successful without facing much trouble at all, it really makes trading easy and simple to do.