Working Paper
Hidden Risk
Abstract: Since 2013, large U.S. hedge fund advisers have been required to report risk exposures in their regulatory filings. Using these data, we first establish that managers’ perceptions of risk contain useful information that is not embedded in fund returns. Investor flows do not respond to this information when managers perceive higher risk than what their past returns would indicate, suggesting managers strategically communicate their risk assessments with investors. During market downturns, investors withdraw capital from funds whose managers perceive higher risk, suggesting they find the performance of these funds in adverse market conditions surprising. These funds are identifiable ex-ante with information that is available to investors.
Keywords: Delegated asset management; Hedge funds; Institutional investors; Investor behavior; Investor flows; Principal agent theory; Risk;
JEL Classification: G23; G14; D82; G11;
https://doi.org/10.17016/FEDS.2024.098
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File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2024098pap.pdf
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2024-12-20
Number: 2024-098