Opacity in hedge funds: Does it create value for investors and managers?

This paper investigates if opacity (measured by means of derivatives usage) creates value for hedge fund investors and managers. Since we do not identify a positive relation between opacity and managers’ revenue, it is not possible to state that opacity is a source of manager’s value creation for hedge fund investors and managers. Even though, considering that opacity is positively associated with risk-taking and negatively related to investors’ adjusted return, we suggest policies aiming at protecting investors, especially the less qualified ones. We employ a unique and comprehensive database related to the positions in derivatives taken by managers. This was possible due to specific disclosure regulatory demands of the Brazilian Securities Exchange Commission, according to which detailed information on hedge funds’ portfolio allocation should be provided on a monthly basis.