Suspicious Patterns in Hedge Fund Returns and the Risk of Fraud

Bollen, Nicolas P. B.; Pool, Veronika Krepely

doi:10.1093/rfs/hhs085

Cited by 103 publications

(55 citation statements)

References 30 publications

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“…We require that each fund has at least 24 return observations over the period from January 2005 to June 2012. A set of used measures is based on Bollen and Pool (2012). Greater manipulation in reported returns are indicated by + or − sigs.…”

Section: Resultsmentioning

confidence: 99%

“…'ARUs' is an indicator variable that is set to 1 if a fund is UCITS-compliant and 0 otherwise. 'PC Misvalution' is the 1 st principal component of the Bollen-Pool (2012) 'red flags'. The conflicts of interest variables are as in Table 4.…”

Section: Resultsmentioning

confidence: 99%

“…We test this claim by constructing a set of indicators proposed by Bollen and Pool (2012) to detect suspicious patterns in reported fund returns.…”

Section: Ucits Regulatory Restrictions and Testable Hypothesesmentioning

confidence: 99%

“…proposed by Bollen and Pool (2012), that are designed to detect suspicious patterns in reported fund returns. 30 Those patterns include: (i) a discontinuity in the distribution of hedge fund returns; (ii) two measures of low correlation between hedge fund returns and the returns on style factors; and (iii) a family of data-quality indicators, such as the percentage of negative returns and the number of exactly zero returns.…”

Section: Suspicious Patterns In Reported Returnsmentioning

confidence: 99%

“…Therefore, our Misvaluation Hypothesis states that UCITS funds should engage less in return management than do hedge funds. We use a set of "red flags" proposed by Bollen and Pool (2012) to establish that hedge funds' reported returns exhibit relatively more suspicious patterns. 9 So in terms of accurate valuations, our results are consistent with interpreting UCITS regulation as being protective of investors and thus as having achieved one of its goals.…”

mentioning

confidence: 99%

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Effect of Regulatory Constraints on Fund Performance: New Evidence from UCITS Hedge Funds

Joenväärä

Kosowski

2015

SSRN Journal

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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. JEL Classifications: G11, G12, G23Keywords: hedge fund performance, mutual fund performance, managerial skill, regulation 1 IntroductionOne goal of financial regulation is to protect investors by ensuring that markets are fair and that fraudulent activities are minimized. Despite calls in 2009 by the G20 (an international finance minister and central bank governor forum) for coordinated international financial regulation following the 2007-2008 financial crisis, financial regulation continues to vary widely by country. With regard to alternative investment funds, regulatory responses -for example, the US Dodd-Frank Act and the European Union's AIFMD 1 -also display significant geographic differences with regard to liquidity requirements, remuneration rules, and risk limits. Such differences almost certainly have a welfare impact by way of the resulting performance and risk differences among alternative investment funds, which are held by pension funds, sovereign wealth funds, and other investors. A particular type of EU investment fund regulation is UCITS, 2 which has global implications because it involves unique and testable restrictions (e.g., the effect of liquidity terms on fund performance) intended to enhance investor protection. We use UCITS restrictions on hedge funds as a natural testing ground for assessing several hypotheses concerning hedge fund performance while carefully adjusting for selection bias.The UCITS funds universe is economically important, and UCITS funds are recognized -and can be marketed -in 75 countries worldwide. The assets under management (AuM) of UCITS funds amount to some $8 trillion, which is comparable to the US mutual fund industry's $11.6 trillion. 3Outside the United States, UCITS funds account for more than half of fund assets worldwide, and about three fourths of the funds publicly sold in Asia are UCITS funds. 4 The impact of UCITS is felt also by non-European investors and managers. For instance, Paulson & Co. (a renowned US hedge fund management firm) launched a UCITS version of its flagship offshore hedge fund with Deutsche Bank in 2010. 5Alternative investment fund managers are increasingly deciding to implement alternative strategies through more regulated vehicles so that they can gain access to the assets of retail and institutional investors, which typically prefer funds that ar...

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Section: Resultsmentioning

confidence: 99%

Section: Resultsmentioning

confidence: 99%

“…We test this claim by constructing a set of indicators proposed by Bollen and Pool (2012) to detect suspicious patterns in reported fund returns.…”

Section: Ucits Regulatory Restrictions and Testable Hypothesesmentioning

confidence: 99%

Section: Suspicious Patterns In Reported Returnsmentioning

confidence: 99%

mentioning

confidence: 99%

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Effect of Regulatory Constraints on Fund Performance: New Evidence from UCITS Hedge Funds

Joenväärä

Kosowski

2015

SSRN Journal

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Financial Fraud: A Literature Review

Reurink

2019

Contemporary Topics in Finance

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Securities Fraud and Corporate Finance: Recent Developments

2013

Manage Decis Econ

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In this paper, I survey the recent research in corporate finance on financial securities frauds. I structure my review around the three subjects in this literature: studies of internal and external factors that elicit managerial incentives for fraudulent activities, studies on regulatory and market-based mechanisms that help to deter or detect fraud and on what affects the efficiency of such mechanisms, and studies on the economic and social consequences of financial fraud. I outline the empirical challenges related to this line of research and discuss opportunities for future studies.

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Suspicious Patterns in Hedge Fund Returns and the Risk of Fraud

Cited by 103 publications

References 30 publications

Effect of Regulatory Constraints on Fund Performance: New Evidence from UCITS Hedge Funds

Effect of Regulatory Constraints on Fund Performance: New Evidence from UCITS Hedge Funds

Financial Fraud: A Literature Review

Securities Fraud and Corporate Finance: Recent Developments

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