DP10577 Effect of Regulatory Constraints on Fund Performance: New Evidence from UCITS Hedge Funds

Author(s):	Juha Joenväärä, Robert Kosowski
Publication Date:	May 2015
Keyword(s):	hedge fund performance, managerial skill, mutual fund performance, regulation
JEL(s):	G11, G12, G23
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=10577

We economically motivate and then test a range of hypotheses regarding performance and risk differences between UCITS-compliant and other hedge funds. The latter exhibit more suspicious return patterns than do absolute return UCITS (ARUs), but ARUs exhibit higher levels of operational risk. We find evidence of a strong liquidity premium: hedge funds offer investors less liquidity than do ARUs yet exhibit better risk-adjusted performance. Our findings are substantially unchanged under various robustness tests and adjustments for possible selection bias. The liquidity premium for ARUs and their lack of performance persistence have implications for both investors and policy makers.