The Economic Consequences of Hedge Fund Regulation: An Analysis of the Effect of the Dodd-Frank Act

Fernán Restrepo

The Journal of Legal Studies, 2024, vol. 53, issue 2, 391 - 434

Abstract: This paper exploits registration data administered by the Securities and Exchange Commission to examine the effect of the Dodd-Frank Act on profitability, risk-taking, and capital formation in the hedge fund industry. The data show that after the act was implemented, there was a significant decline in investors’ profitability that can be at least partially attributed to direct compliance costs. However, compliance costs do not fully explain the results: part of the decline seems to be driven by collateral effects of compliance, particularly the diversion of managerial attention from core business activities and/or adjustments to financial valuation or reporting practices. The data also show that risk-taking did not change significantly and that although managers closed funds and launched fewer funds in response to the law, this behavior did not result in lower assets under management.

Date: 2024
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