The following post comes to us from Andrew Patton of the Department of Economics at Duke University, and Tarun Ramadorai and Michael Streatfield, both of the Saïd Business School.
In the paper, The Reliability of Voluntary Disclosures: Evidence from Hedge Funds, which was recently made publicly available on SSRN, we examine the reliability of these voluntary disclosures by hedge funds, by tracking changes to statements of performance in the publicly available hedge fund databases recorded at different points in time between 2007 and 2011. In each vintage of these databases, hedge funds provide information on their performance from the time they began reporting to the database until the most recent period. We find evidence that in successive vintages of these databases, older performance records (pertaining to periods as far back as fifteen years) of hedge funds are routinely revised. This behavior is widespread: nearly 40% of the 18,382 hedge funds in our sample have revised their previous returns by at least 0.01% at least once, and over 20% of funds have revised a previous monthly return by at least 0.5%. While positive revisions are also commonplace, negative revisions are more likely and larger when they occur, i.e., on average, initially provided returns present a rosier picture of hedge fund performance than finally revised performance. Moreover, these revisions are not random. Indeed, we employ information on the characteristics and past performance of hedge funds to predict them. For example, funds in the Emerging Markets style are significantly more likely to have revised their histories of returns than Fixed Income funds, and larger funds, more volatile funds, and less liquid funds are all more likely to revise.
