Return smoothing, liquidity costs, and investor flows: Evidence from a separate account platform

We use a new hedge fund data set from a separate account platform to examine (1) how much of hedge fund return smoothing is due to main fund-specific factors, such as managerial reporting discretion and (2) the costs of removing hedge fund share restrictions. These accounts trade pari passu with matching hedge funds but feature thirdparty reporting and permissive share restrictions. We use these properties to estimate that 33% of reported smoothing is due to managerial reporting methods. The platform's fund-level liquidity is associated with a 1.7% performance reduction on an annual basis. Investor flows chase monthly past performance on the platform but not in the associated funds.