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Hedge Fund Regulation and Misreported Returns
Authors:Douglas Cumming  Na Dai
Institution:1. York University – Schulich School of Business, 4700 Keele Street, Toronto, Ontario M3J 1P3, Canada
E‐mail: dcumming@schulich.yorku.ca;2. Center for Institutional Investment Management, School of Business, SUNY at Albany, 1400 Washington Ave, Albany, NY 12222, USA
Abstract:This paper introduces a cross‐country law and finance analysis of the misreporting behaviour 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 capitalisation 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  G23  G24  G28  K22  M43
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