A Law and Finance Analysis of Hedge Funds


  • We owe thanks to the Bill Christie (the editor) and an anonymous referee for extremely helpful and timely feedback. Sofia Johan, Andrew Karolyi, and Michael King provided very helpful comments and suggestions, and Li Que provided research assistance. Also, we owe thanks to the seminar participants at Hofstra University, Vanderbilt Law School, the American Law and Economics Association Annual Conference at Harvard Law School, the Western Finance Association Annual Conference, the Northern Finance Association Conference, the DeGroote Conference on Market Structure and Market Integrity, the Financial Intermediation Research Society Conference, the Amsterdam Conference on Financial Intermediation at the Crossroads, and the European Financial Management Symposium at the University of Cambridge Judge Institute of Management. Also, we thank Wendy Jennings for copyediting.


This paper empirically analyzes the impact of hedge fund regulation on fund structure and performance. The data indicate restrictions on the location of key service providers and permissible distributions via wrappers are associated with lower fund alphas, lower average monthly returns, and higher fixed fees. Furthermore, restrictions on the location of key service providers are associated with lower manipulation-proof performance measures, while wrapper distributions are associated with lower performance fees. As well, the data show standard deviations of monthly returns are lower among jurisdictions with restrictions on the location of key service providers and higher minimum capitalization requirements.