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December 20, 2007

Hedge Funds: Why Stop Reporting Performance?

I love these Zen-ish financial questions: Why do hedge funds stop reporting performance? As most people will know, hedge funds are not required to report performance, but many still do, at least until they don't.

So, why do they stop? A cynic/realist would say the answer is obvious: They stop reporting when their returns go to hell. Why report poor returns if you don't have to? And further, once returns are bad for a while there is no need to report anything at all, as the fund is generally being wound down.

That's it then, right? Yes, unless you're a conspiracy theorist, a hedge fund booster, or an academic. Because there is another view out there, one that says some hedge funds stop reporting returns because they don't need more money. I hear hedge fund managers whisper regularly about such-and-such a fund that doesn't report returns, but is turning in a 28% net annualized, and has for years.

Well, a new-ish study looks into this and comes to the unsurprising conclusion that while some of those secret, high-return funds undoubtedly exist, the main reason for hedge funds clamming up about their returns is that said returns newly suck. In other words, while 25% annualized super-quiet funds may exist, more often than not it's a myth or a scam, as will surprise no-one who has read the fascinating story of GMM/LF Global here in San Diego. (More here. And why this fascinating story of a $120m hedge fund gone criminally kerflooey has never received much attention nationally, let alone locally, remains as baffling to me as ever.)

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