Paper presentation at 9:00 AM on Friday, October 11 at the University of Illinois in Champaign Urbana – Presentation at the Midwestern Law & Economics Association.
Hedge Fund Performance After the Dodd-Frank Act – A Regression Discontinuity Analysis
Wulf A. Kaal (UST Minneapolis)*
Barbara Luppi (Modena Italy)*
Sandra Paterlini (EBS Germany)*
Title IV of the Dodd-Frank Act introduced the most significant regulatory change in the history of the hedge fund industry in the United States, boosting the permissible regulatory oversight of the hedge fund industry to an unprecedented level. Title IV and SEC implementation rules introduced a registration requirement for hedge fund managers and increased the disclosure requirements pertaining to confidential and proprietary information. We study the impact of Title IV of the Dodd-Frank Act and the SEC’s implementation of these requirements on hedge fund performance by applying the Imbens and Lemieux (2008) methodology to a regression discontinuity design in the context of hedge fund performance. This approach has not previously been applied in this context.
Contrary to the hedge fund industry’s claims that increased supervision and disclosure would affect their profitability, we find statistical evidence of a positive effect of the requirements introduced by the Dodd-Frank Act on hedge fund performance. In particular, we find that: 1) the registration requirement for hedge fund advisers under the Dodd-Frank Act creates a discontinuity in hedge fund returns in March 2012. However, this effect is not persistent and is completely absorbed in the months following the registration effective date for private fund advisers under the Dodd-Frank Act; 2) strategic actions by fund advisers lead to a strong increase in the discontinuity around the AUM registration threshold. The effect is also absorbed in later months of the sample.
Our results are consistent with prior studies and we believe this preliminary analysis can provide policy makers with an important first impression of the possible implications of Title IV.