Kudlow & Cramer tonite

http://www.nytimes.com/2004/03/21/business/yourmoney/21stra.html

Behind Many Enticing Hedge Funds, Stale Prices
By MARK HULBERT

STALE prices, which have been a problem for mutual funds, afflict hedge funds as well. A group of researchers has concluded that these out-of-date prices have made many hedge funds appear to be better performers than they really are.

Stale prices exist in hedge funds for the same reason they do in mutual funds. Both types of funds typically calculate their net asset values by using the prices of the last trades of the securities they own; stale prices result from the delay between those last trades and that calculation.

But stale prices are more widespread in hedge funds than in mutual funds, because hedge funds often hold illiquid securities that go long periods without trading. That is one reason that hedge funds, which are lightly regulated and usually restricted to affluent investors, typically limit the purchase or sale of their shares to no more than once a month, and sometimes less often than that. The cap prevents arbitrageurs from exploiting the stale prices of hedge funds the way they have with mutual funds.

Because of stale prices, the reported returns of hedge funds often deviate significantly from what the returns would be if the funds could use up-to-date prices. Those deviations have the effect of hiding the correlation of the average hedge fund’s returns with those of the stock market, according to a recent study by Clifford Asness, Robert Krail, and John Liew, all principals at AQR Capital Management, an investment management firm in New York.

An article titled “Do Hedge Funds Hedge?,” describing an early version of their research, appeared in the fall 2001 issue of The Journal of Portfolio Management. The researchers, who originally looked at the period from January 1994 through September 2000, have since extended their research through February 2004.

Most hedge funds pursue so-called market-neutral or absolute-return strategies intended to make money whether the stock market goes up, down or sideways. In theory, their performance should not be closely linked to that of the overall stock market.

The researchers found that if hedge funds’ returns were calculated with accurate prices, the average fund’s correlation to the stock market would nearly double. This means that the average hedge fund is significantly more sensitive to stock-market movements – climbing when the market gains and declining when it falls – than it seems when returns reflect stale prices. In other words, the average hedge fund is much less hedged against stock-market volatility than many investors think….