Illiquidity in Intermediate Portfolios: Evidence from Large Hedge Funds

Abstract

Views and opinions expressed are those of the authors and do not necessarily represent official positions or policy of the OFR or Treasury. Comments and suggestions for improvements are welcome and should be directed to the authors. OFR working papers may be quoted without additional permission.

The Hedge Fund Industry Is Bigger (and Has Performed Better) Than You Think

“…Although we note that Managed Futures funds in the Form PF data may not be representative due to Commodity Trading Advisers ability to report to the CFTC and not to Form PF. These results are consistent with Barth and Monin (2018), who find substantial alpha using the Form PF data over a similar sample period.…”

“…This suggests the positive alphas in non-publicly reporting funds are not entirely captured by managers in the form of higher fees (as may be predicted in a Berk and Green (2004) style model, for instance), but instead are partially passed through to fund investors. Barth and Monin (2019) suggest this may be due to investors demanding additional compensation for tighter share restrictions, which managers use to pursue more illiquid strategies with less certain payoff horizons. Figure 8 shows the same result is evident in the PDFs.…”

Leverage and Risk in Hedge Funds

“…To estimate the performance fee, we divide the total fee minus the estimated management fee by the total gross return minus the management fee, all in annual percentages, and winsorize at the 10 th and 90 th percentiles. Barth and Monin (2019) show that this procedure produces credible estimates for the management and performance fees, both unconditionally and based on a matched sample of funds that appear both Form PF and TASS, the latter of which fee data is collected explicitly.…”

“…Managers typically charge two sets of fees: a recurring management fee, and a performance fee if, due to good performance, fund assets exceed their previous high water mark. These fees are not reported on Form PF; instead, we estimate them using reported gross-and net-of-fee returns according to a method originated in Barth and Monin (2019) and outlined in Appendix A. The mean estimated management fee is 1.02% with a standard deviation of 0.99%, and the mean estimated performance fee is 13.37% with a standard deviation of 9.25%.…”

“…SeeBarth and Monin (2019),Aragon, Ergun, Getmansky, and Girardi (2017b), and Aragon, Ergun, Getmansky, and Girardi (2017a) for more on these liquidity measures.…”