Out of the Dark: Hedge Fund Reporting Biases and Commercial Databases

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Abstract
We examine the self-reporting bias in hedge fund data. Using holdings data from a set of limited partners, we construct a novel set of returns for hedge funds that otherwise have never reported to a commercial database. These returns allow, for the first time, a direct comparison of performance between funds that choose to report and funds that do not. We find evidence that estimates of managerial skill using self-reported data are significantly positively biased. We show that this result is primarily driven by poorly performing funds and funds that stop reporting to databases. The nature of our data allows us to measure the performance of these funds even after they exit the databases - the so-called “dead” funds. Quarterly returns for funds that have stopped reporting are dramatically lower than returns matched to a database. We examine the risk implications caused by the self-reported data. Commonly used measures of tail-risk are larger for non-reported returns than for the reported data, indicating that the self-reporting may bias estimates of hedge fund risk downward.

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