Explanation

Return smoothing occurs when hedge fund managers artificially adjust portfolio valuations to create more stable returns over time. Let's analyze each option:

A. Higher Sharpe ratio - ✅ CONSEQUENCE

• Return smoothing reduces volatility (standard deviation) in the denominator of the Sharpe ratio
• Since returns are smoothed but the average return may remain similar, the Sharpe ratio increases

B. Lower volatility - ✅ CONSEQUENCE

• By smoothing returns, managers reduce the variability of returns over time
• High returns are reduced and low returns are increased, creating a more stable return pattern

C. Higher serial correlation - ✅ CONSEQUENCE

• Return smoothing creates artificial persistence in returns
• Current period returns become correlated with previous period returns due to the smoothing mechanism

D. Higher market beta - ❌ NOT A CONSEQUENCE

• Return smoothing does not necessarily increase the portfolio's sensitivity to market movements
• Beta measures systematic risk relative to the market, and smoothing primarily affects the idiosyncratic component of returns
• In fact, return smoothing might actually reduce measured beta by dampening the portfolio's response to market movements

Therefore, higher market beta is not a consequence of return smoothing, making option D the correct answer.