The Effect of Regulatory Constraints on Fund Performance: New Evidence from UCITS Hedge Funds

Abstract

This paper examines the effect of regulatory constraints on fund performance and risk by comparing conventional and UCITS hedge funds. Using a matching estimator approach, we estimate the indirect cost of UCITS regulation to be between 1.06% and 4.05% per annum in terms of risk-adjusted returns. These performance differences are likely to stem from UCITS constraints such as those governing eligible assets, diversification, and short selling, and cannot be explained by differences in redemption terms or level of leverage. We confirm that our performance results are not driven by management company characteristics, fund manager characteristics or unobserved confounder bias.

Keywords: hedge fund performance, mutual fund performance, managerial skill, regulation, constraints

JEL Classification: G11, G12, G23