A behavioural game-theoretic analysis of hedge fund regulation

Research output: Contribution to journalArticle

Abstract

We analyse the efficacy of hedge fund regulation in a behavioural game-theoretic model consisting of two players: a hedge fund manager and a regulator. The regulator decides whether or not to regulate hedge fund strategies, and location of key service providers (KSPs). The manager then decides (a) which KSP to choose, (b) whether to choose a safe or risky strategy, and (c) how much effort to exert in affecting the strategy’s success probability. We consider the effect of expected future fund flows on the manager’s incentives. Furthermore, we consider economic and behavioural factors affecting the regulator’s decision-making. Finally, we discuss how our two cases (myopic versus far-sighted managerial behaviour) may inform the debate over regulation over the entire financial market-cycle. Overall, our analysis contributes to the debate on hedge fund regulation.

LanguageEnglish
Pages1-29
Number of pages29
JournalThe European Journal of Finance
Early online date3 Aug 2017
DOIs
StatusE-pub ahead of print - 3 Aug 2017

Fingerprint

Hedge funds
Service provider
Managers
Fund flows
Fund managers
Efficacy
Economics
Game-theoretic models
Managerial behavior
Incentives
Decision making
Financial markets
Factors

Keywords

  • ability
  • effort
  • fund flows
  • hedge funds
  • incentive contracts
  • regulation

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)

Cite this

A behavioural game-theoretic analysis of hedge fund regulation. / Fairchild, Richard.

In: The European Journal of Finance, 03.08.2017, p. 1-29.

Research output: Contribution to journalArticle

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