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Once A Liar, Always A Liar - Hedge Fund Performance Revisions

Tyler Durden's picture




 

The last few years have exposed many of the previous masters-of-the-universe for the beta-hugging, momentum-chasing, herd-like leveraged (and occasionally unethical) monkeys that they are. There are many exceptions to this rule, however, and some research by Oxford University sheds some light on how future performance of a hedge fund is considerably divergent based on that hedge fund's revision of performance in global hedge fund databases. It may seem odd to many that the performance of a fund is 'flexible' but this relates to the voluntary reporting of changes from the initial performance to the latest print for that period's performance. The research finds that since 2007, while revisions are relatively balanced (between positive and negative), funds that revised their performance have drastically lower performance (and dramatically higher fund outflows) than funds that did not 'revise' their performance. With trust being such a valuable asset nowadays, it seems giving managers a second chance has perhaps been academically proven a losing bet (Meriwether, Corzine, and many others).

The recently published paper by Patton, Ramdorai, and Streatfield of Oxford University examines the performance of hedge funds that revise prior performance with the goal of shedding light on the regulatory changes with regard voluntary versus involuntary disclosure of historical performance.

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. These revisions are widespread, with nearly 40% of the 18,382 hedge funds in our sample (managing around 45% of average total assets) having revised their historical returns at least once.

The abstract is as follows:

We analyze the reliability of voluntary disclosures of ?financial information, focusing on widely-employed publicly available hedge fund databases. Tracking changes to statements of historical performance recorded at different points in time between 2007 and 2011, we ?find that historical returns are routinely revised. These revisions are not merely random or corrections of earlier mistakes; they are partly forecastable by fund characteristics. Funds that revise their performance histories significantly and predictably underperform those that have never revised, suggesting that unreliable disclosures constitute a valuable source of information for current and potential investors. These results speak to current debates about mandatory disclosures by financial institutions to market regulators.

Perhaps the most telling charts, at least from our perspective, in terms of trust are:

Cumulative Alpha for funds that 'revised' performance relative to funds that never 'revised'.

And the growth in AUM via inflows and outflows shows even more disparity:

So perhaps - the great financial crisis has taught us one thing - honesty pays! Or perhaps not, as the endless stammerings of global central bankers, politicians, and self-serving strategists suggests the bigger the lie, the more likely it is to be believed by the plebeians.

 

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Sun, 11/06/2011 - 18:57 | 1851392 midgetrannyporn
midgetrannyporn's picture

gold bitchez

ron paul bitchez

Sun, 11/06/2011 - 19:09 | 1851425 Pladizow
Pladizow's picture

History's one reliable constant: human nature.

Sun, 11/06/2011 - 20:04 | 1851565 Whoa Dammit
Whoa Dammit's picture

On a long enough timeline, everything is open to interpretation.

Personally, I would trust the numbers of the  hedge funds that revised more than I would the numbers of the hedge funds that did not revise.

Sun, 11/06/2011 - 18:58 | 1851396 d_senti
d_senti's picture

Occasionally unethical? SOMEONE'S feeling generous today!

Sun, 11/06/2011 - 19:01 | 1851398 Sequitur
Sequitur's picture

Hedge funds, money losers. 2% + 20% = you are getting skullfucked, and these assholes are using your money to do it. Good luck to all the dopes who still chase alpha with these bads, you'd be better off giving your fiat to the UBS delta desk.

Sun, 11/06/2011 - 19:11 | 1851431 RoadKill
RoadKill's picture

Yeah all these HF managers are 0 value add monkeys throwing darts at a board.

Ohh wait, on average they are creating Alpha? Hmm that can't be right....

People should fire their slow money managers. Those are the really over paid monkeys that on average UNDERPERFORM index funds BEFORE fees.

Sun, 11/06/2011 - 19:32 | 1851469 Monedas
Monedas's picture

From Charity to Crap Shoots......it sure must be fun to spend OPM ! Monedas 2011 Comedy Jihad Socialism Simplified PS: OPM = OPiuM (Phonetically speaking !)

Sun, 11/06/2011 - 19:38 | 1851489 Roy T
Roy T's picture

 

I worked at a Hedge Fund, and after years of reporting the monthly returns to databases, at some point in 2007, it was decided that they would no longer report our performance.

Sun, 11/06/2011 - 20:06 | 1851571 tmosley
tmosley's picture

Are there a lot of these kinds of accidents?

You wouldn't believe.

Which car company do you work for?

A major one.

Sun, 11/06/2011 - 19:39 | 1851496 Freddie
Freddie's picture

The majority suck except - James Chanos, Hugh Hendry (you want out - he returns your money in 5 days) and Ray Dalio at Bridgewater.  Pretty much the rest are scum like Stevie Cohen, Corzine, Madoff, and Raj the fat Sri Lankan felon.  

Sun, 11/06/2011 - 22:10 | 1851805 Thomas
Thomas's picture

I like Einhorn.

Mon, 11/07/2011 - 10:18 | 1852809 Variance Doc
Variance Doc's picture

Cornell !!!!!

Sun, 11/06/2011 - 20:30 | 1851617 RobotTrader
RobotTrader's picture

Looks like the 4th Quarter Santa Rally PigRun is on.

Futures are up.

Lots of guys will be looking to chase every small crap stock they can find that is on the "Largest % Gainers" list.

Whatever it takes to "Make Their Year"

Sun, 11/06/2011 - 20:34 | 1851624 buzzsaw99
buzzsaw99's picture

You got that right. I went long every dog stock on the big board last week bitchez. WOOF!

Sun, 11/06/2011 - 23:04 | 1851884 Yen Cross
Yen Cross's picture

Always appreciate  your comments Buzz.  Thanks Yen.

Sun, 11/06/2011 - 20:33 | 1851623 Eally Ucked
Eally Ucked's picture

What if you lie all the time and don't revise your statements at all? Who pays for research like that?

Sun, 11/06/2011 - 21:26 | 1851725 Buck Johnson
Buck Johnson's picture

The whole ponzi scheme is about to go under and people are running scared.

Sun, 11/06/2011 - 22:24 | 1851833 El Gordo
El Gordo's picture

You want the truth?  You can't handle the truth,

Sun, 11/06/2011 - 22:51 | 1851870 Yen Cross
Yen Cross's picture

 Overlays , are great Instigators. The " PIN points, are redundant! "...   An SPX chart is about as usefull as a TAMPON , during communion>

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