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

This article examines the effect of regulatory constraints on fund performance andrisk by comparing conventional and UCITS hedge funds. Using a matching estima-tor approach, we estimate the indirect cost of UCITS regulation to be between 1.06%and 4.05% per annum in terms of risk-adjusted returns. These performance differen-ces are likely to stem from UCITS constraints such as those governing eligibleassets, diversification, and short selling, and cannot be explained by differences inredemption terms or level of leverage. We confirm that our performance results arenot driven by management company characteristics, fund manager characteristics,or unobserved confounder bias.