Abstract - Caught in the Act: How Hedge Funds Manipulate their Equity Positions

Using 13F position valuations, we show that hedge fund advisors intentionally mismark their stock positions. We document manipulation even after eliminating issues inherent in the pricing of illiquid securities. Hedge fund advisors mark their positions up (down) following poor (good) performance of their equity holdings. Mismarking is more pronounced for advisors that are audited less frequently; are domiciled in offshore locations; self-report to a commercial database; and report more frequently to investors. Furthermore, equity mismarking is related to some of the reported return patterns documented in previous studies, such as a discontinuity in the distribution of returns around zero and smoothed returns.

Alexander Kempf
Universität zu Köln
26.Apr 2011

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