Hedge Fund Forum Shopping

Abstract

Hedge funds have been the subject of media attention in the United States (US) and around the world given the pronounced growth of the hedge fund sector in recent years and the comparative dearth of regulations faced by hedge fund managers. The first part of this paper provides an overview of the potential agency problems associated with managing a hedge fund, and associated rationales for hedge fund regulation. While hedge funds are hardly regulated in the US, there are nevertheless jurisdictions outside the US with different and sometimes more onerous sets of regulatory requirements. Examples of international differences in hedge fund regulation include minimum capitalization requirements, restrictions on the location of key service providers and different permissible distribution channels via private placements, banks, other regulated or non-regulated financial intermediaries, wrappers, investment managers and fund distribution companies. The second part of this paper provides an analysis of hedge fund strategies in the context of international differences in hedge fund regulation. Certain fund strategies have been characterized in the law and finance literature, as well we in popular media and public policy debates, as being inherently more risky and associated with more pronounced agency problems. For instance, managed futures, long/short and event driven strategies might be associated with greater risk and agency problems than market neutral equity strategies and various arbitrage strategies. At issue, therefore, is whether funds engage in forum shopping to select jurisdictions that potentially offer greater scope for agency problems associated with hedge fund management. The data examined offer little or no support for the view that hedge fund managers pursuing riskier strategies or strategies with potentially more pronounced agency problems systematically select jurisdictions with less stringent regulations. For the most part, fund strategies are not systematically and statistically related to different regulations observed in different jurisdictions. In fact, to the extent that there is evidence of forum shopping, it is such that funds pursuing riskier strategies or strategies with greater potential agency problems select jurisdictions with more stringent regulations. We may infer from the evidence that forum shopping by fund managers in relation to fund strategic focus is not consistent with a 'race to the bottom'. Rather, hedge fund managers appear to select jurisdictions that are in funds' investors' interests in order to facilitate capital raising by the hedge fund.