Disclosure Policies of Investment Funds

We examine voluntary and mandated disclosure of portfolio holdings by investment funds in a model where funds are characterized as having a stream of investment ideas and as providing liquidity to investors through redemption. We show that the greater is the fund's liquidity provision role, the more aggressively the fund trades on its ideas, the stronger is its preference to disclose information about its holdings voluntarily, and the weaker is its performance. We also show that mandatory disclosure can decrease information available in securities markets by crowding out the acquisition of private information that, through funds' trading, would be reflected in prices. Our model provides an explanation for why hedge funds and mutual funds differ in their resistance to public disclosure, and is consistent with stylized facts regarding how funds' investment decisions respond to poor performance and how differences in disclosure policies affect the future performance of well versus poorly performing funds.