Did the STOCK Act impact the performance, risk and flow of hedge funds?

PurposeThis research aims to examine hedge funds’ performance, risk and flow before and after the implementation of the Stop Trading on Congressional Knowledge (STOCK) Act.Design/methodology/approachThis paper includes the use of different factor models to highlight the performance and risk of hedge funds before and after the implementation of the STOCK Act. Hedge fund holdings are retrieved from Thomson Reuters Lipper Hedge Fund Database (TASS).FindingsThis study finds significant differences before and after the implementation of the STOCK Act. The results for the entire sample period indicate that hedge funds suffered lower-alpha, standard deviation and idiosyncratic risk after the implementation of the STOCK Act.Originality/valueThe paper’s originality and value lie in addressing the relationship gap between the STOCK Act and hedge fund performance.

Financial Industry Affiliation and Hedge Fund Performance

Affiliation with a financial conglomerate may provide hedge funds with superior information about the conglomerate’s lending, investment banking, and brokerage clients; such affiliation can also lead to potential conflicts with the other units of the conglomerate and exacerbate the conflict between hedge fund companies and hedge fund investors. We find that affiliated funds significantly underperform unaffiliated funds. A difference-in-difference analysis confirms the negative relation between financial industry affiliation and hedge fund performance. Affiliated funds pursue asset-gathering strategies, overweight their conducted initial public offerings/seasoned equity offerings clients’ stocks, are more likely to commit legal and regulatory violations, and tend to exhibit a greater number of internal conflicts. Our results are consistent with conflict of interest exerting a negative impact on the performance of affiliated hedge funds. However, it is possible that lack of skill also contributes to the underperformance of affiliated funds. This paper was accepted by Karl Diether, finance.