Inconsistent Disclosures

Abstract

Recent SEC regulations mandate that hedge fund advisers provide narrative disclosures of their business and operations. We find that 40% of these disclosures contain plausible inconsistencies regarding advisers' regulatory histories, conflicts of interest (COIs), and risks. Inconsistencies are associated with predictably lower performance and thus reflect omissions of likely material information. Inconsistent funds do not differ in their fund flows, flow-performance relation, leverage, ownership structure, or management fees, and thus appear to benefit by de-emphasizing fund problems and misleading attention-constrained market participants. Our study shows that inconsistencies represent a valuable signal largely ignored by even "sophisticated'' investors and highlights the need for regulatory review to reduce misleading disclosures.