Substantial minority of hedge funds tend to smooth returns, study finds

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Approximately 30% of hedge funds that trade in illiquid securities have a tendency to smooth out their returns, according to a study conduced by RiskData, a Paris-based risk measurement company.

Firms that do so achieve more stable-seeming returns by assessing hard-to-value assets based on variable considerations rather than hard and fast external benchmarks, RiskData found. While not necessarily fraudulent, unsystematic valuation methods can unfairly stabilize a fund’s returns on paper, putting these funds at an advantage in fundraising and asset retention as compared to competitors that, using stricter methods, appear to have more volatile performance.

The study found that,