Are restrictive regulations behind surfeit of “slightly positive results”?
Nov 19th, 2007 | Filed under: Hedge Fund RegulationYesterday, we told you about a study released last month showing that when it comes to photo finishes, hedge funds are more likely to produce “marginally positive results” rather than ones that are either flat or marginally negative. Researchers concluded that some hedge fund managers may be goosing returns by just enough to turn a slightly negative result into a slightly positive result – a small change that could make a world of difference to them and to their fund raising activities.
Now a new study suggests one possible underlying reason for this phenomenon: regulation. Douglas Cumming and Le Qui of York University find evidence that “differences in hedge fund regulation significantly affects the propensity of fund managers to misreport monthly returns.”
Specifically, they find less evidence of misreporting of returns in jurisdictions that allow hedge funds to be sold via “investment managers” since such third parties provide a de facto monitoring function. Conversely, they find more evidence of misreporting in jurisdictions that allow hedge funds to be sold in “wrappers” where managers generally experience less direct oversight.
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