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Investor Protection and Capital Fragility: Evidence from Hedge Funds around the World
[Liquidity transformation and financial fragility: Evidence from funds of hedge funds]

Author

Listed:
  • George O Aragon
  • Vikram Nanda
  • Haibei Zhao
  • Wei Jiang

Abstract

We find that capital flows to hedge funds in different countries are influenced by the strength and the enforcement of investor protection laws. Hedge funds located in weak investor protection countries exhibit greater sensitivity of investor outflow to poor performance, relative to funds in countries with strong protection. Furthermore, weak investor protection is associated with fund managers engaging in greater returns management. Our findings suggest that in countries with weaker investor protection, poor fund performance exposes investors to a greater risk of fraud and legal jeopardy, thus triggering a larger outflow of capital.

Suggested Citation

  • George O Aragon & Vikram Nanda & Haibei Zhao & Wei Jiang, 2021. "Investor Protection and Capital Fragility: Evidence from Hedge Funds around the World [Liquidity transformation and financial fragility: Evidence from funds of hedge funds]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1368-1407.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:3:p:1368-1407.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa051
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    Cited by:

    1. Dai, Na & Nahata, Rajarishi & Brauner, Aaron, 2022. "Does individualism matter for hedge funds? A cross-country examination," Journal of Corporate Finance, Elsevier, vol. 72(C).

    More about this item

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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