Does your hedge fund manager smooth returns intentionally or inadvertently?

We propose an econometrically logical approach that distinguishes intentional from inadvertent smoothing of hedge fund return. Other than the hedge fund return (Y) we introduce an explanatory variable: a market portfolio of hedge fund returns (X). By connecting X and Y, some critical parameters are found to be effectively related to testing the two types of return smoothing. Using those parameters, we develop distinct desmoothing algorithms against intentional and inadvertent smoothing. Our empirical results show that although intentional smoothing is partly responsible for hedge fund smoothing and is done more consistently than inadvertent smoothing, return smoothing is mainly caused by the nature of underlying assets.