Corruption Perceptions and Capital Fragility: Evidence from Hedge Funds Around the World
52 Pages Posted: 6 Aug 2018
Date Written: June 28, 2018
We find that country-level corruption perceptions influence capital flows to the global hedge fund industry. Hedge funds in high corruption countries exhibit a greater sensitivity of investor outflows to poor fund performance compared to funds in low corruption countries. Corruption perceptions also influence manager behavior and fund policies as indicated by stronger evidence of returns management, tighter contractual restrictions on investor redemptions, and greater managerial investment of personal capital. Our findings suggest that operational risk concerns such as risk of fraud, poor investor protection, and weak legal enforcement associated with corrupt environments generate capital fragility.
Keywords: Corruption, hedge funds, flow-performance, fragility, operational risk
JEL Classification: G15, G23
Suggested Citation: Suggested Citation