Investors should be alert to this, and the study found that this practice may "turn" a loss month into a profit month. With the rapid increase of the number of hedge funds (currently more than 7,500), it is increasingly important for fund managers to count the number of rising months and falling months in order to attract and retain investors' funds.
In recent months, while the credit market is bleak, how to price securities that are difficult to calculate net worth has become a hot topic on Wall Street. Sometimes, it is difficult for banks, brokers and hedge funds to accurately determine the price of some bonds that are not frequently traded or have large bid-ask spreads.
The most famous case of hedge fund pricing recently is Ellington Capital Management, a hedge fund company that focuses on bond investment and manages $5.2 billion in assets. In a letter to clients on September 30, Ellington said that due to the turmoil in the credit market, two of his bonds were affected and his two funds would be suspended from redemption.
According to the letter, it is impossible to determine the net asset value on the premise of fairness to investors who want to redeem the fund and investors who remain in the fund.
There is no indication that Ellington did anything wrong. The letter said that the company's practice is not to respond to investors' redemption requests, recover deposits or any other problems.
A spokesman for Ellington declined to comment. New York Post reported on the company's actions.
At present, investors, auditing departments and regulators are all concerned about how banks and brokerage companies judge the value of these securities. However, recent research shows that hedge funds may be more worthy of attention.
Academic research has found that there is a big gap between the number of fund managers who report a slight increase and the number of fund managers who report a slight decrease in any month. This gap is most obvious for funds engaged in securities trading with poor liquidity. However, there is no such gap in funds that mainly trade stocks or futures contracts. The stock or futures contract market is active and easy to price. This also means that some funds may fabricate results.
The authors of the study, Porun and Veronica K Poole, said that hedge fund managers may deliberately fabricate the value of their portfolios to avoid reporting losses to investors. Porun is an associate professor of finance at Vanderbilt University, and Bohr is an assistant professor of finance at Indiana University. They wrote in the report that if forgery really happens, investors may underestimate the potential losses in the future and may overestimate the ability of fund managers.
This study uses the hedge fund database of Massachusetts University to analyze the monthly return data of 4,268 hedge funds with different investment styles from 1994 to 2005.
At present, the market has gradually calmed down from the credit crisis in August. To solve the crisis, the Federal Reserve cut the federal benchmark interest rate by 50 basis points in September. On Monday, Hennessee Group LLC, a hedge fund consultancy, said that its hedge fund index fell by nearly 1% in August and rose by 2.26% in September. By the end of September, the index had increased by more than 65,438+00% this year. During the same period, the Dow Jones Industrial Average and the S&P 500 index rose by 1 1.5% and 7.7% respectively.
This spring, when two funds of Dambert Stearns were in trouble, the pricing of illiquid securities first came into public view. One of the funds initially announced a loss of 6.5% in April, but a few weeks later, investors learned that the fund actually fell by 20% that month. The fund told investors that this change was due to the downward adjustment of the estimated price of securities that are not easy to value.
Fund managers have great flexibility in judging whether such securities are profitable or not. For example, as long as they are consistent, they can choose whether to use the buying quotation or selling quotation of a security to calculate the value of the portfolio, and the two prices sometimes differ greatly. They can also choose different quotations from different brokerage companies as "bid prices". If the hedge fund expects to lose money in a certain month, the fund manager may choose optimistic prices for some securities, so that the fund as a whole will not fall and will not consider the price of amplifying the loss.
Because banks and brokerage companies are publicly traded institutions, the valuations they adopt are usually subject to review by investors and auditors. The recent market turmoil has prompted the regulatory authorities to conduct an in-depth investigation into the prices adopted by brokerage companies.
On the other hand, hedge funds will not be subject to the same scrutiny. Most of them are not registered with the Securities and Exchange Commission, and many hedge funds are even registered in offshore tax havens such as Cayman Islands. In addition, some funds are audited only once a year, which means that monthly estimates may not be reviewed by external auditors.
Previous studies have found that under the ever-changing economic situation, all kinds of hedge funds can obtain relatively stable returns. Porun and Bohr's recently published papers have also done research in this field, but the conclusions are different. Their paper points out that fund managers will round up the rate of return to ensure that the fund will rise slightly and will not cover up the appreciation and losses.
Generally speaking, the yield of hedge funds will present a familiar normal distribution curve, and its high point will fall in a slightly rising region. Trading stocks with neutral strategy (whether the stock price is expected to fall or rise) will have such performance, while the strategy of illiquid securities will not.
The paper points out that this may not be surprising: when managers have greater opportunities to play their own initiative, it is easier to distort the rate of return.