DP8898 Change You Can Believe In? Hedge Fund Data Revisions

Author(s): Andrew J Patton, Tarun Ramadorai, Michael Streatfield
Publication Date: March 2012
Keyword(s): asymmetric information, disclosure, finance regulation, hedge funds, performance
JEL(s): D82, G14, G23, L15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8898

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. Moreover, 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.