Change You Can Believe In? Hedge Fund Data Revisions

Andrew J. Patton, Tarun Ramadorai, Michael Streatfield
2012 Social Science Research Network  
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 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
more » ... nd predictably underperform those that have never revised, suggesting that unreliable disclosures constitute a valuable source of information for investors. These results speak to current debates about mandatory disclosures by financial institutions to market regulators. IN JANUARY 2011, THE SECURITIES and Exchange Commission (SEC) proposed a rule requiring U.S.-based hedge funds to provide regular reports on their performance, trading positions, and counterparties to a new financial stability panel established under the Dodd-Frank Act. A modified version of this proposal was voted for in October 2011, and was phased in starting late 2012. The rule requires detailed quarterly reports (using new Form PF) for 200 or so large hedge funds, those managing over U.S.$1.5 billion, which collectively account for over 80% of total hedge fund assets under management (AUM); for smaller hedge funds, the reports are less detailed, and are required only annually. The rule states clearly that the reports will only be available to the regulator, with no provisions regarding reporting to funds' investors. Nevertheless, hedge funds argued against the adoption of the rule, citing concerns that the government regulator responsible for collecting the reports could not guarantee that their contents would not eventually be made public. 1
doi:10.2139/ssrn.1934543 fatcat:dschrsd5l5ebncahpegtcsdoki