The effects of management and provision accounts on hedge fund returns - Part II: The Loss Carry Forward scheme

Abstract

In addition to active portfolio management, hedge funds are characterized by the allocation of portfolio performance between the external investors and the management firm accounts. This allocation can take different forms, such as the Loss Carry Forward scheme, and some of them can be coupled with performance smoothing techniques. This paper shows that this additional smoothing component might explain some empirical facts observed on the distribution and the dynamics of hedge fund returns. © Springer International Publishing Switzerland 2014.