TAX POLICY: THE EFFECT ON HEDGE FUND INVESTOR BEHAVIOR

The purpose of this essay is to empirically analyze the effect of changes in tax policies on hedge fund flows. We analyze the effect of the Tax Information Exchange Agreements (TIEAs) on hedge fund flows and, indirectly, on hedge fund manager and investor behavior in six tax haven countries. The results show that the introduction of TIEAs caused structural changes in hedge fund net flows 20 months prior to their signature dates. Investors are aware that TIEAs will be signed before the actual signing date and act on this information. We also examine whether the hedge fund flows of the countries that signed TIEAs differed from that of the countries that did not sign TIEAs. The results show that although TIEAs cause structural changes and some outflow in tax haven countries' hedge fund dollar flows and net flows, it is not enough to offset the other benefits of investing in these countries because both the dollar flows and net flows of these countries increased after their structural breakpoints (SBPs). We conjecture that this is due to an amalgam of factors and that a different class of investors took the place of those who shifted their funds due to the regulatory changes.