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Hedge Fund Regulation and Misreported Returns

Hedge Fund Regulation and Misreported Returns. Discussant: Mark C. Hutchinson 12 1 Department of Accounting, Finance and Information Systems, UCC 2 Centre for Investment Research, UCC. Paper Contributions. Paper Contributions Find evidence of misreported returns.

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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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