18/10/2010
University researchers accuse hedge funds of flagrant falsifications
An analysis of the period 1999 to 2008 in quarterly 13Ffilings withthe SEC, stating the valuation of hedge funds’ positions on equities, reveals that about 7% of all statements of positions were falsified, meaning that hedge funds used other valuations than the market. The findings come in a working document from the Centre for Financial Research (CFR) at the University of Cologne, available at http://www.cfr-cologne.de/download/workingpaper/cfr-10-15.pdf.According to the authors of the study, Gjergji Cici (Mason School of Business), Alexander Kempf and Alexander Puetz (both of CFR- University ofCologne), the deviations show that hedge funds knowingly manipulate their valuation, as these variations are not random and serve the interest of managers.The authors show, firstly, that false valuations aim to make returns look better by reducing volatility and boosting the Sharpe ratio.Secondly, the divergences with reality are highest for funds which have the least risk to be controlled.Thirdly, the largest deviations are for hedge funds which are the most aggressive in the use of publicity materials which state their returns.Lastly, the study shows that suspicious performance profiles appear particularly for funds which most amply or most frequently falsify their equities positions.
