[We provide a simple argument that suggests that better-informed hedge funds choose to have less exposure to factor risk. Consistent with this argument, we find that hedge funds that exhibit lower tf-squareds with respect to systematic factors have higher Sharpe ratios, higher information ratios, and higher alphas. They also exhibit higher manipulation-proof performance measures and charge higher fees.]

We provide a simple argument that suggests that better-informed hedge funds choose to have less exposure to factor risk. Consistent with this argument, we find that hedge funds that exhibit lower R-squareds with respect to systematic factors have higher Sharpe ratios, higher information ratios, and higher alphas. They also exhibit higher manipulation-proof performance measures and charge higher fees.