We investigate hedge fund firms' unobserved performance (UP), measured as the riskadjusted return difference between a fund firm’s reported return and hypothetical portfolio return derived from its disclosed long equity holdings. Fund firms with high UP outperform those with low UP by 7.2%...

We investigate hedge fund firms' unobserved performance (UP), measured as the risk-adjusted return difference between a fund firm's reported return and hypothetical portfolio return derived from its disclosed long equity holdings. Fund firms with high UP outperform those with low UP by 7.2% p.a....

Hedge funds, on average, outperform other actively managed funds. However, hedge fund managers often use trading strategies that are not used by other managed portfolios, and thus they bear unique risks. In particular, many hedge funds use short selling. I construct an option-based measure of...