Did the Dodd-Frank Act Impact Hedge Fund Performance ?

Abstract

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 means of Regression Discontinuity and Difference-inDifference empirical designs. 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 the registration requirement for hedge fund advisers under the Dodd-Frank Act creates a discontinuity in hedge fund returns at the registration effective date, March 30, 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. Strategic actions by fund advisers lead to a strong increase in the discontinuity around the AUM registration threshold, despite the effect being absorbed in later months.