Investor Protection and Capital Fragility: Evidence from Hedge Funds Around the World

Review of Financial Studies, forthcoming

66 Pages Posted: 6 Aug 2018 Last revised: 7 Feb 2020

See all articles by George O. Aragon

George O. Aragon

Arizona State University (ASU) - Finance Department

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Haibei Zhao

Lehigh University - College of Business

Date Written: February 6, 2020

Abstract

We find that capital flows to hedge funds in different countries are influenced by the strength and the enforcement of investor protection laws in these countries. Hedge funds that are located in weak investor protection countries exhibit a greater sensitivity of investor outflow to poor performance, relative to funds in countries with strong protection. Furthermore, weak investor protection is associated with fund managers engaging in greater returns management. Our findings suggest that in countries with weak investor protection, poor fund performance exposes investors to a greater risk of fraud and legal jeopardy, thus triggering a larger outflow of capital.

Keywords: Investor protection, hedge funds, flow-performance, fragility, operational risk

JEL Classification: G15, G23, D73

Suggested Citation

Aragon, George O. and Nanda, Vikram K. and Zhao, Haibei, Investor Protection and Capital Fragility: Evidence from Hedge Funds Around the World (February 6, 2020). Review of Financial Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3207064 or http://dx.doi.org/10.2139/ssrn.3207064

George O. Aragon (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Haibei Zhao

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

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