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Hedge Fund Regulation and Misreported Returns

This paper by Mark C. Hutchinson from the Department of Accounting, Finance and Information Systems at UCC explores the phenomenon of misreported returns in hedge funds. It provides empirical evidence on regulatory conditions under which hedge fund managers are more inclined to misreport their returns. The findings reveal intriguing factors affecting misreporting, enlightening regulators and enriching the discourse on the intersection of law and finance in hedge fund oversight. Suggestions for enhancing methodology and literature review are also discussed.

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Hedge Fund Regulation and Misreported Returns

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  1. Hedge Fund Regulation and Misreported Returns Discussant: Mark C. Hutchinson12 1 Department of Accounting, Finance and Information Systems, UCC 2 Centre for Investment Research, UCC

  2. Paper Contributions Paper Contributions • Find evidence of misreported returns. • Empirically examine under which regulatory conditions hedge fund managers are more likely to misreport. Overall • Interesting paper examining interaction of law and finance in context of hedge funds. • Nice extension of Bollen and Whalley (2007) • Intriguing findings about the type of factors which influence mis-reporting – should be of interest to regulators.

  3. General Comments • Literature review could be more developed particularly in relation to hedge fund regulation • Data and results are well described and interpreted • Methodology could be more thoroughly described • Reader needs a better explanation as to why some decisions have been made e.g. the choice of the logit model? • Author could also more thoroughly ground the choice of control variables in the literature.

  4. Specific Comments • Need to provide a better explanation about discontinuity around zero (see figure 1). Explain why it is assumed that all raw returns from 0 to +0.5% are mis-reported. • Perhaps report test-statistic from Bollen et al (2007). • Can it be assumed that all of the marginally positive returns are misreported? • Some of the results seem counterintuitive – In some cases regulations which would seem to be stricter have more mis-reporting. This is intriguing and deserves more analysis.

  5. Specific Comments - Minor • Explain some of the terminology (wrappers, private placements etc.) perhaps in an appendix? • Perhaps the choice of models and factors could be more closely linked to the prior literature. • Better explain ex ante expectations of how each of these factors influence mis-reporting. • Normalize the variables in the regressions so it is easier to compare coefficients (e.g. $,000s, dummies etc) • Sample - 690 funds x 36 months = 24,840 obs. Fig 1 has 24,786 obs – explain why the other obs were left out.

  6. Ideas • Perhaps look at funds that smooth using Getmansky et al (2004) methodology. • This is a form of mis-reporting, which is arguably more easily measured. • Repeat the other analysis of the regulatory factors affecting this mis-reporting.

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