Fooling the Savvy Investor: Secrecy and Hedge Fund Performance
If a quali ed investor has a choice between investing in a secretive fund and a transparent fund with the same investment objective, which should she choose? Prior work suggests hat the secretive fund is better. Hedge fund managers generally use their discretion for the bene t of their investors (Agarwal, Daniel and Naik, 2009, Agarwal, Jiang, Tang and Yang, 2013). In this study we identify a subset of hedge funds managers, which appear to use their discretion to feign skill. Using a proprietary dataset obtained from a fund of funds, we document that hedge funds that are more secretive earn somewhat higher returns than their investment-objective-matched peers during up markets, consistent with earlier papers documenting skill-based performance, but signi cantly worse returns during down markets. This evidence suggests that at least part of the superior performance that secretive funds appear to generate is in fact compensation for loading on additional risk factor(s) as compared to their objective-matched peers.