I. Introduction

While hedge funds may choose to voluntarily disclose private information to commercial databases, the hedge fund’s performance before “birth” (i.e., the date on which a fund begins to self-report) and after “death” (i.e., the date on which a fund ceases to self-report) has traditio- nally been a black box. Because the way in which hedge funds raise capital differs from that of other financial institutions, such as banks and mutual funds, hedge funds have largely avoided mandatory disclosure requirements under federal securities laws. As such, those seeking to understand and analyze the industry have largely relied on self-reported data provided to commercial databases. This sets up an inherent self-selection bias – the data relating to fund performance are disclosed only for the periods in which the fund chooses to share its performance (if it chooses to report at all), so are these data reflective of the true performance of the fund?

We attempt to answer this question by analyzing fund characteristics before birth and after death. Hedge funds will voluntarily report to commercial databases when the benefits outweigh the costs, so there is reason to expect a self-selection bias, although it is difficult to assess the magnitude – or even the direction – of the bias. The primary benefit from voluntary disclosure is that listing in commercial databases increases a fund’s exposure to investors, which is particularly beneficial to smaller and younger funds seeking greater publicity. Moreover, choice of listing in a particular database can be driven by client’s geographical consideration, e.g., Asian clients may have a preference for Eurekahedge database that has an exten- sive coverage of Asian hedge funds. However, there can be significant costs associated with listing in databases, namely a loss of privacy and secrecy. Though self-reporting funds generally do not reveal their holdings information to commercial databases, the reported information can reveal the funds’ investment strategy. In addition, funds may not want to list subsequent to outflows to prevent further redemptions from investors.

We attempt to quantify the degree of self-reporting bias in hedge fund databases using one of the few mandatory disclosures for hedge funds: Form 13F. The Securities and Exchange Commission (SEC) requires that hedge funds disclose their quarterly equity holdings on Form 13F, so we compare the holdings of voluntary reporters with those of non-reporters for all hedge fund companies that filed Form 13F between 1980 and 2008. Because of the mandatory nature of the 13F filings, this sample is largely free of self-selection for funds that manage more than $100 million in equity positions. Among all 13F-filing hedge fund companies, we determine their self-reporting status by matching them to any of the five major hedge fund commercial databases.

Our analysis consists of two steps. First, we analyze the dynamics of returns and fund flows around the birth and death of a fund. For those funds that choose to self-report, we find that performance deteriorates significantly after…