Hedge Fund Regulation and Misreported Returns
York University - Schulich School of Business
State University of New York at Albany - School of Business & Center for Institutional Investment Management
July 27, 2010
European Financial Management, Forthcoming
This paper introduces a cross-country law and finance analysis of the misreporting behavior in the hedge fund industry in terms of smoothing returns so that a fund consistently generates positive returns. We find strong evidence that international differences in hedge fund regulation are significantly associated with the propensity of fund managers to misreport monthly returns. We find a positive association between wrappers and misreporting, particularly for funds that do not have a lockup provision. Also, we find some evidence that misreporting is less common among funds in jurisdictions with minimum capitalization requirements and restrictions on the location of key service providers. We assess the robustness of our finds to a number of specifications, including, different specifications of misreporting bin widths, subsets of the data by fund type, as well as specifications controlling for collinearity and selection effects and other robustness checks. We show misreporting significantly affects capital allocation, and calculate the wealth transfer effects of misreporting and relate this wealth transfer to differences in hedge fund regulation.
Number of Pages in PDF File: 33
Keywords: Hedge Funds, Regulation, Misreported Returns, Law and Finance
JEL Classification: G23, G24, G28, K22, M43Accepted Paper Series
Date posted: July 28, 2010 ; Last revised: September 4, 2010
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