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The Impact of Dodd-Frank Act Compliance Cost on the Hedge Fund Industry

25 Pages Posted: 3 Feb 2014 Last revised: 28 May 2014

Wulf A. Kaal

University of St. Thomas, Minnesota - School of Law

Date Written: February 1, 2014

Abstract

A common complaint suggests that compliance with financial regulation brings increasing returns to scale and predominantly affects smaller firms. Many studies have shown that an inverse relationship exists between the size of regulated firms and the per-unit cost of compliance. Anecdotal evidence suggests that Title IV of the Dodd-Frank Act, mandating hedge fund adviser registration and increased disclosures, affects mostly smaller hedge fund advisers. To estimate the effect of Title IV on smaller hedge fund advisers, this study evaluates survey data collected after the registration effective date for hedge fund advisers under Title IV.

The author finds no evidence of an inverse relationship between the size of regulated hedge fund advisers and the per-unit cost of compliance. The cost of Title IV compliance and other independent variables as proxies for cost are associated with the size of hedge fund advisers as measured by assets under management (AUM). These findings are inconsistent with the hypothesis that the cost of financial regulation predominantly affects smaller firms. To explain these findings, the author evaluates hedge funds’ use of single versus multiple investment strategies and the associated Title IV compliance costs.

Keywords: Hedge Funds, Regulation, Dodd-Frank Act, Compliance Cost

JEL Classification: G23, G24, G28, K22

Suggested Citation

Kaal , Wulf A., The Impact of Dodd-Frank Act Compliance Cost on the Hedge Fund Industry (February 1, 2014). U of St. Thomas (Minnesota) Legal Studies Research Paper No. 14-11. Available at SSRN: https://ssrn.com/abstract=2389423 or http://dx.doi.org/10.2139/ssrn.2389423

Wulf A. Kaal (Contact Author)

University of St. Thomas, Minnesota - School of Law ( email )

MSL 400, 1000 La Salle Avenue
Minneapolis, MN Minnesota 55403-2005
United States

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