The Journal of Finance

Unobserved Performance of Hedge Funds

Published: 07/10/2024   |   DOI: 10.1111/jofi.13368

VIKAS AGARWAL, STEFAN RUENZI, FLORIAN WEIGERT

We investigate hedge fund firms’ unobserved performance (UP), measured as the risk‐adjusted return difference between a firm's reported gross return and its portfolio return inferred from its disclosed long‐equity holdings. Firms with high UP outperform those with low UP by 6.36% per annum on a risk‐adjusted basis. UP is negatively associated with a firm's trading costs and positively associated with intraquarter trading in equity positions, derivatives usage, short selling, and confidential holdings. We show that limited investor attention can delay investors’ response to UP and lead to longer lived predictability of fund firm performance.

Role of Managerial Incentives and Discretion in Hedge Fund Performance

Published: 09/28/2009   |   DOI: 10.1111/j.1540-6261.2009.01499.x

VIKAS AGARWAL, NAVEEN D. DANIEL, NARAYAN Y. NAIK

Using a comprehensive hedge fund database, we examine the role of managerial incentives and discretion in hedge fund performance. Hedge funds with greater managerial incentives, proxied by the delta of the option‐like incentive fee contracts, higher levels of managerial ownership, and the inclusion of high‐water mark provisions in the incentive contracts, are associated with superior performance. The incentive fee percentage rate by itself does not explain performance. We also find that funds with a higher degree of managerial discretion, proxied by longer lockup, notice, and redemption periods, deliver superior performance. These results are robust to using alternative performance measures and controlling for different data‐related biases.

Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide

Published: 11/26/2012   |   DOI: 10.1111/jofi.12012

VIKAS AGARWAL, WEI JIANG, YUEHUA TANG, BAOZHONG YANG

This paper studies the “confidential holdings” of institutional investors, especially hedge funds, where the quarter‐end equity holdings are disclosed with a delay through amendments to Form 13F and are usually excluded from the standard databases. Funds managing large risky portfolios with nonconventional strategies seek confidentiality more frequently. Stocks in these holdings are disproportionately associated with information‐sensitive events or share characteristics indicating greater information asymmetry. Confidential holdings exhibit superior performance up to 12 months, and tend to take longer to build. Together the evidence supports private information and the associated price impact as the dominant motives for confidentiality.

Mandatory Portfolio Disclosure, Stock Liquidity, and Mutual Fund Performance

Published: 01/27/2015   |   DOI: 10.1111/jofi.12245

VIKAS AGARWAL, KEVIN A. MULLALLY, YUEHUA TANG, BAOZHONG YANG

We examine the impact of mandatory portfolio disclosure by mutual funds on stock liquidity and fund performance. We develop a model of informed trading with disclosure and test its predictions using the May 2004 SEC regulation requiring more frequent disclosure. Stocks with higher fund ownership, especially those held by more informed funds or subject to greater information asymmetry, experience larger increases in liquidity after the regulation change. More informed funds, especially those holding stocks with greater information asymmetry, experience greater performance deterioration after the regulation change. Overall, mandatory disclosure improves stock liquidity but imposes costs on informed investors.