There has been some talk recently of hedge fund managers misreporting returns to the various voluntary databases that collect such information.  According to a study by Nicolas Bollen of Vanderbilt and Veronika Pool of Indiana University, hedge fund managers show a curious propensity to have more slightly positive months than they do to have flat or slightly negative months.  In fact, the study found that up to 10% of fund returns in one major database are statistically “distorted”. 

You don’t have to be a statistician to see it (chart below).

According to the study, hedge fund managers also seem to have smoother returns when they are performing poorly.  Researchers conjecture that this is because managers have an ability to “manage earnings” and are more likely to do so when their returns stink.  That way, at least they can reduce volatility and goose their Sharpe ratio even if returns are lackluster.

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