Working Paper: CEPR ID: DP10577
Authors: Juha Joenväär; Robert Kosowski
Abstract: 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.
Keywords: hedge fund performance; managerial skill; mutual fund performance; regulation
JEL Codes: G11; G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| UCITS regulation (G18) | return management practices of funds (G35) |
| UCITS regulation (G18) | operational risk (D80) |
| ARUs (R19) | operational risk (D80) |
| UCITS regulations (F38) | risk-adjusted returns (G12) |
| UCITS regulations (F38) | performance metrics (C52) |
| liquidity constraints (E41) | performance (D29) |