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Over 20% Of Hedge Fund Managers Are Liars
A new study out of NYU Stern School of Business finds what many have known intuitively for years: namely that a material portion of hedge fund managers (over 20%) routinely misrepresent or outright lie about their funds and associated performance. From the Stern report (attached below):
We find that misrepresentation about past legal and regulatory problems is frequent (21%), as is incorrect or unverifiable representations about other topics (28%). Misrepresentation, the failure to use a major auditing firm and the use of internal pricing are significantly related to legal and regulatory problems, indices of operational risk.
Here is how the authors aggregated the data used in the study:
Our sample consists of 444 due diligence reports compiled by HedgeFundDueDiligence.com, a third party hedge fund due diligence service provider. These funds are managed by 403 different advisors over the period 2003 to 2008. The DD report information is gathered by the company through several channels: the offering document and marketing materials provided by the manager, on site interviews with the manager, and forms filled out by the manager. They augment this by verifying operational controls, assets under management, and performance with the administrator. Finally, they attempt to verify the authenticity of the audit with the auditor and perform a background check on the management company and its key staff.
While it should obvious why a clean sheet is critical when it comes to hedge funds, the authors provide this narrative which should be required reading of everyone at the SEC:
In part because the SEC does not allow hedge funds to engage in general solicitation, they have historically relied on trusted referrals as a prime distribution channel. This reliance on referrals, and the limited transparency with respect to performance and operations, are potential reasons why the Madoff scheme could last so long. Relatively few third party entities had access to performance statistics, information about firm auditors, pricing policies, self-administration and custody. In an environment lacking multiple, comparable sources of information about an agent’s credibility, trust is even more important, as are mechanisms to verify trustworthiness.
Some more of the in depth discoveries presented by the paper:
- We find approximately 20% of funds have managers who misrepresented past problems or their
background information. - While funds without Big 4 auditors may indeed be better performers, an alternative explanation for
these findings is that the returns reported by firms without Big 4 auditors may not be trustworthy. Small and young funds perform better due to mangers’ desire to establish their track records while the positive coefficient on “notice period” may indicate a liquidity premium. - Funds that strategically lie on their DD reports have higher performance than other funds after the DD report. As with the auditor result in the prior analysis, perhaps these funds are better funds. However, since these managers appear to only strategically lie to the DD company, they may also choose to “game” the return data reported to investors, which causes these funds to appear superior to their peers.
- We also find funds that have external pricing have lower performance than funds that price their own
portfolios. Non-independent pricing allows the opportunity to inflate performance through “cherry picking” of model prices or outright fraud. [not sure why this is an issue: after all the FASB has mandated major banks model their own balance sheets as they see fit, so one can likely scratch off internal pricing as a risk factor due to the administration's wholehearted endorsement of this action.] - Artificially high performance could attract more flows from other investors, allowing such things as performance smoothing or allowing fraudulent Ponzi schemes to continue over long periods. [someone should notify the S&P about this one]
- We now find some limited evidence that transparency can lead to higher fund flow. Funds that voluntarily disclosed all of their prior problems have higher flows, and funds for which it was difficult to reconcile manager statements with other information experience lower flows. [this is one that Obama and his makeshift call for increased transparency can presumably agree with. Alas it may also explain why the volume in the market has declined precipitously over the past year.]
And the conclusion:
Some of our results were to be expected. We find that funds with legal or regulatory problems are less trustworthy. We also found that the relationship with a major auditing firm was a sufficient statistic for the tendency to tell the truth. This is particularly important as we find that misrepresentation of pertinent facts is a leading indicator of future fund failure. This strongly suggests that the role of the auditing firm is an important one in the market for investment services, especially hedge funds and other service providers that are lightly regulated.
Full study below (and attached):
h/t Rolleiphotoguy
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What a world...
Look at the USD index at 1307... whatever it takes to take the DJ to 10,000?
and we are surprised by this revelation ?
A much lower precentage that the general population as a whole!
I find it very interesting that the reports general findings fall into the old 80-20 rule known to, and respected by, so many.
Once again I find 20% are doing what the other 80% are not.
That leads to the next question. What are 20% of the 20% liars really doing?
You rascal Cognitive Dissonance! You asked my question exactly--the 80/20 rule is very handy dandy!!!
no shit
Wonder what made them want to look into this...
Dow 10,000 means we are back to nomal apparently. So that means silly risk taking, no regard for valuation, and Wall Street being completely clueless with other people's money again.
To paraphrase a famous line:
"I am shocked, shocked to find that greedy sociopaths frequently tell lies."
I need smelling salts!
Ah, it's the old 80/20 rule. So, apparently the 20%ers are pathological crooks. My guess is they are driven by their Uncle Screwtape envy of the Devil's brother himself - GS.
I think even this number is conservative. Many fund managers truly believe in their alpha/beta/correlation/
null hypothesis bullshit when in reality their past
performance is pure luck.
Dow 10,000 yey yey!!
And it lasted about as long as I did "my first time".
Wouldn't it be fitting if that REALLY winds up being the top of this whole phony, liquidity-driven rally?
Did you really just use "my first time" in the same post as "liquidity-driven rally?"
This is a finance blog, right...
Im calling a top at 11,000. That would a 69.2% move off the bottom. What a great place to go short.
IMPORTANT FED/TREASURY/TBTFs DECREE:
If you have lost or are losing your house, life savings, access to credit, purchasing power and job, plese be adviced to be extremely happy today and to go in a shopping spree... the Dow Jones Industrial Index today reached 10,000 points and the USD moved forward with its collapse.
FED/TREASURY/TBTFs (aka "The Gang")
C'mon! Would Jim Cramer lie to you?
BREAKING!!!!!
Water is wet.
And the other 80%?
You know just because someone is "honest" and "sincere" something... does not mean they are telling the truth, just that they "believe" what they are telling you.
And most people are easily duped or misled.
Dow 10,000
The index was reshuffle dhow many times? The entire thuings is a clear case of idiocy of course the CNBC cheerleaders are glowing. it is curious that the NYSE just happened to be handing out Dow 10,000 hats -- is that like the communist rallies where they hand out the pictures of Mao and hold up applause signs?
Dow 10,000
1999 - Fed Funds 4.75% Gas $1.20 Crude Oil $16.44 Gold $280
2009 - Fed Funds 0-0.25% Gas $2.48 Crude Oil $75 Gold $1063.
So basically you wanted to be anywhere but stocks lol!
When you take into account also that US stocks are overvalued by 33%... you start to realize the US will go down in history as a bigger failure than the USSR.
Yes we can! Print print print!
Who knows how much really fucking dumb money is going to fly into this market now. The MSM will have a field day. Watch this sucker continue to fly.
The percentage estimate of dissemblers is too low. If you review hedge and mutual fund documents and their purported strategies, more than 20% seem to be doing things that contradict their stated strategy. Lots claim to invest for the long term, and be value investors seeking absolute returns, and be willing to hold cash if they can't find cheap investments. What percentage actually do that? Less than 80% of those that claim to. No doubt. Lots are value pretenders, not value investors.
TD...will u be selling 'Dow 10,000' shirts & hats in the ZH store? :))
20% is an underestimate:
The really good liars lied in a way that could pass as stating the truth. Or better, as stating nothing.
This is easier than you think. I should imagine the people caught out lying were just dumb.
Lottery tickets and payday loans exist to siphon money from the poor. Hedge funds serve the same function for the wealthy. If you want hedge fund performance, set fire to 2% of all your money, and put the rest in VFINX. You'll fare even better than the typical hedge fund. I'm also saving your the 20% performance fee assessed by most funds.
Someone's lying, or misunderestimating the "20%" being liars.
ALL hedge fund managers are liars, as are all living forms of life except those that wake up dead. That's right.
If 20% are liars then the rest are cheats?
we all lie
http://www.geocities.com/changes1611/sins22lies1.html
well if you think hedge fund managers are dishonest, take a look at the russian state destroying hermitage capital...
it is a look at what is happening in the usa today but
with velvet gloves....
http://www.theinternationalforecaster.com/International_Forecaster_Weekl...
I heard Erin Arvedlund speak about her Madoff book tonight:
http://www.amazon.com/Too-Good-Be-True-Ber...55659769&sr=8-1
She's good and also worked in the 2/20 industry.