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The authors investigate the extent to which hedge fund managers smooth self-reported returns. In contrast with prior research on the "Anomalous" properties of hedge fund returns, they observe the mechanisms used to price the fund's investment positions and report the fund's performance to investors, thereby allowing one to differentiate between asset illiquidity and misreporting-based explanations. They find that funds using less verifiable pricing sources and funds that provide managers with greater discretion in pricing investment positions are more likely to have returns consistent with intentional smoothing.
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