Working Paper: CEPR ID: DP14873
Authors: Olga Kuzmina; Patrick Kelly; Sergiy Gorovyy
Abstract: Using a proprietary database that tracks secrecy with respect to a hedge fund's own investors, we find few benefits to own-investor secrecy. These findings contrast with research on secrecy regarding public disclosure. Secretive funds do not outperform transparent funds, and significantly underperform their strategy-matched peers through the financial crisis, consistent with secretive funds loading on unmeasured risks, but inconsistent with own-investor secrecy signalling skill. Though no different in terms of portfolio concentration and leverage, secretive funds are larger, less liquid, more complex, and more likely to file 13F disclosures and request confidential treatment from those disclosures. Secretive funds have lower flow-to-performance sensitivity, even controlling for illiquidity, suggesting that investors do view secretive and transparent funds differently.
Keywords: Hedge Funds; Disclosure; Secrecy; Transparency; Risk Premia
JEL Codes: G01; G11; G23; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| secrecy (D82) | hedge fund performance (G23) |
| secretive funds (G23) | underperform strategy-matched peers (L19) |
| secretive funds (G23) | lower flow-to-performance sensitivity (E50) |
| secrecy does not predict future performance (D80) | future performance (L25) |
| secretive funds perform similarly in up markets (G23) | hedge fund performance (G23) |
| secretive funds significantly underperform in down markets (G23) | hedge fund performance (G23) |