Grey matters: Douglas J. Cumming and Na Dai, “Capital flows and hedge fund regulation” (30 July 2009)

Journal of Empirical Legal Studies, 2009. Available at SSRN: http://ssrn.com/abstract=1441505

Abstract:
This paper introduces a cross-country law and finance analysis of the regulatory impact on the level of capital flows and the sensitivity of capital flows in response to prior performance (that is, the ‘flow-performance’ relationship) in the hedge fund industry. The data indicate that distribution channels in the form of wrappers, securities that combine different products, mitigate flow-performance sensitivity. Distribution channels via investment managers and fund distribution companies enhance flow-performance sensitivity. Funds registered in countries that have larger minimum capitalisation requirements have higher levels of capital flows. Funds registered in countries, which restrict the location of key service providers have lower levels of capital flows. Further, offshore fund flows and calendar effects evidenced in the data are consistent with tax factors influencing capital flows. The findings are robust to selection effects for offshore registrants, among other robustness checks.

CFR comment:

Readers with a taste for statistics will want to turn immediately to the tables in this paper by two business school professors. The figures provide a wealth of interesting results from a sophisticated analysis of data on hedge fund money flows during 2003-2005. Using data from the Centre for International Securities and Derivatives Markets, the paper provides what appears to be the first substantial empirical analysis of how investors allocate money across hedge funds in different countries. Both hedge fund professionals and regulators should find this paper to be of great interest. A final note: the paper is published in one of the rare peer-reviewed US legal academic journals and so is a cut above the usual in American legal scholarship.

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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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