Can Performance Presentation be Successfully Regulated Part II

From Trust and Delegation by Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz First Draft: June 16, 2009

"Funds that strategically lie on their DD reports have higher performance than other funds after the DD report....perhaps these funds are better funds. However, since these managers appear to only strategically lie to the DD company, they may also choose to “game” the return data reported to investors, which causes these funds to appear superior to their peers.

We also find funds that have external pricing have lower performance than funds that price their own portfolios. Non-independent pricing allows the opportunity to inflate performance through “cherry picking” of model prices or outright fraud."

Operational definition of "strategic liar": managers who voluntarily disclosed past problems but Due Diligence firm found additional legal or regulatory problems that would have been expected to be disclosed.

Can Performance Presentation Be Successfully Regulated?

From Trust and Delegation by Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz First Draft: June 16, 2009

"An event study shows that the DD reports are typically issued on high return funds three months after the historical performance has peaked. The DD reports are also issued at the point of highest investor flow into the fund. This pattern is consistent with return chasing behavior by institutional hedge fund investors. Brown et al. (2008) found no evidence that knowledge of operational risk in any way mediated the fund flow performance relation."

Would that be an investor behavior impervious to the most draconian regulation?