Caught in the Act:How Hedge Funds Manipulate their Equity Positions

Using 13F position valuations, we show that hedge fund advisors intentionallymismark their stock positions. We document manipulation even after eliminatingissues inherent in the pricing of illiquid securities. The documented mismarking isrelated to hedge fund incentives. Mismarking is more pronounced for advisorsthat self-report to commercial hedge fund databases and increases after advisorsstart reporting. Significantly stronger mismarking is also documented amongadvisors that report more frequently to their current investors and are domiciled inoffshore locations. Our analysis shows that advisors employ mismarkingstrategically to smooth their reported returns and push otherwise small negativereturns above zero.