Hedge fund managers use complicated writing to deceive

By Kevin Manne

BUFFALO, N.Y. —  Take note, investors: An investment strategy filled with confusing language can be a sign of dishonesty, according to research from the University at Buffalo School of Management.

Recently published in SSRN, the study found that hedge fund managers who use complex writing experience more regulatory actions, report more severe infractions and violate more investment rules.

On the other hand, hedge fund managers with clearer, more expansive vocabularies were found to be more honest and were linked to higher returns, outperforming funds with complex write-ups by 3.63% annually.

“Convoluted writing can be a sign that a fund manager has something to hide,” says Cristian Tiu, chair and associate professor of finance in the UB School of Management. “They don’t want to divulge too much and inadvertently reveal the inconsistencies in their operations.”

To determine the complexity of hedge fund writing, the researchers evaluated more than 21,000 funds from 1994 to 2016 and analyzed the number of distinct words, grammatical structure, and sentence and paragraph length. They then ran a series of robustness tests to verify the strength of their results.

The good news, though, is that the study found investors tend to put more money into funds with more understandable descriptions than those that are more complicated to read.

“The richness of the vocabulary used by a portfolio manager provides legitimate insight into their sophistication as an investor,” says Tiu.

Tiu collaborated on the study with Juha Joenväärä, assistant professor of finance at Aalto University, Jari Karppinen, doctoral student at the University of Oulu, and Melvyn Teo, the Lee Kong Chian Professor of Finance at the Singapore Management University Lee Kong Chian School of Business.