Should hedge funds be cautious reporting high returns?

In a recent article, Schuster and Auer (2012) show that fund managers with a certain positive performance need to be aware of thefact that too high prospective excess returns can lower the empirical Sharpe ratio of their funds. In this note, we investigate theempirical relevance of this effect. We analyse whether hedge fundsbeing evaluated on the basis of the Sharpe ratio negatively influence their performance by reporting too high returns. Our resultsshow that a economically significant number of hedge funds listedin the CISDM hedge fund database has at least once reported a highreturn causing this effect. (C) 2013 Elsevier B.V. All rights reserved.