Hedge funds earn more than 2.5 times their average monthly return during December, according to Narayan Naik, director of the BNP Paribas sp...

Hedge funds earn more than 2.5 times their average monthly return during December, according to Narayan Naik, director of the BNP Paribas sponsored London Business School Hedge Fund Centre. In a paper called "Why is Santa So Kind to Hedge Funds?" Dr Naik said that the "December bonanza" could be explained by managers massaging returns to increase their incentive fees. "Part of it can be explained by the risks taken and part by the performance of equity markets in December, but those circumstances do not explain it fully. If someone has an incentive fee payable on year-end December figures, there could be more temptation to push them up in December," he said. Dr Naik said that hedge funds faced with missing performance targets often take more risks in December to "catch up" with their benchmarks so that they can charge performance fees. The research does not imply, though, that hedge funds are breaking any regulatory codes: “ If hedge funds buy at the last minute, it's not illegal,” said Dr Naik. The research also points out that traditional mutual funds tend to perform better towards the end of the year.