Does Portfolio Disclosure Make Money Smarter?

Abstract

We document the benefits of mandatory portfolio disclosure in the hedge fund market. We study investor purchasing and selling decisions, captured by hedge fund flows. After a fund begins filing Form 13F with the Securities and Exchange Commission, we find that investor flows are better able to predict fund performance (i.e., money becomes "smarter"). In particular, the spread in performance between high- and low-flow funds is 3.7 percentage points higher for filing funds compared with non-filers. We analyze cross-sectional differences in the precision, usefulness, and access of information, and find evidence that the increase in smart money is driven by the information channel. These results help contribute to the cost-benefit analysis of mandatory disclosure.