Investor Protection and Capital Fragility: Evidence from Hedge Funds around the World

George O. Aragon, Vikram Nanda, Haibei Zhao

Research output: Contribution to journalReview articlepeer-review

1 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1368-1407
Number of pages40
JournalReview of Financial Studies
Volume34
Issue number3
DOIs
StatePublished - Mar 1 2021

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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