Hedge Fund Regulation and Misreported Returns

33 Pages Posted: 16 Apr 2008 Last revised: 12 Jul 2010

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Na Dai

SUNY at Albany - School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: February 11, 2008


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.

Keywords: Hedge Funds, Regulation, Misreported Returns, Law and Finance

JEL Classification: G23, G24, G28, K22

Suggested Citation

Cumming, Douglas J. and Dai, Na, Hedge Fund Regulation and Misreported Returns (February 11, 2008). Available at SSRN: https://ssrn.com/abstract=1029195 or http://dx.doi.org/10.2139/ssrn.1029195

Douglas J. Cumming (Contact Author)

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Na Dai

SUNY at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

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