Study Finds That Title IV of Dodd-Frank Act Affects Private Fund Industry Negatively

Economists studying the impact of Title IV of the Dodd-Frank Act concluded that it has had a negative effect on the performance of the private funds industry. In a study titledDid the Dodd-Frank Act Impact Private Fund Performance? - Evidence from 2010-2015, University of St. Thomas School of Law Associate Professor Wulf A. Kaal, University of Modena and Reggio Emilia Professor of Economics Barbara Luppi, and EBS University of Law Chair of Financial Econometrics and Asset Management Sandra Paterlini assessed Title IV of the Dodd-Frank Act by analyzing five years' performance data for private funds.

Based on reported data from "about 7,000 private funds and more than 3,700 private fund advisers," the study supports private fund industry claims that the "increased supervision and disclosure mandated in the Dodd-Frank Act have a negative effect on private fund earnings." The study used "a sample of 887 private funds that report all the monthly earnings data and monthly assets under management ('AUM') in each period from January 2010 to August 2014."

The authors rejected claims by the private fund industry that the negative impact of Title IV was catalyzed by (i) higher compliance costs and (ii) management's practice of "taking time away from their core duties because they had to address heightened legal and disclosure requirements under the Dodd-Frank Act."

Professor Kaal remarked that due to a "lack of data," the study was unable to "evaluate several theoretical explanations for a negative impact," including (i) "a possible feedback effect between compliance reporting and the fund managers' strategy, its positions, and diversification," (ii) "managers . . . employing questionable practices address[ing] perceived issues with portfolios or strategies in light of enhanced reporting obligations in the aftermath of the Dodd-Frank Act" and (iii) "managers chang[ing] the portfolio composition post-Dodd-Frank because of concerns about SEC supervision related to particular strategies and corresponding positions."