Based on geographically disparate regulatory constraints, such as share restrictions and risk/leverage limits, we economically motivate and test a range of hypotheses regarding differences in performance and risk between UCITS-compliant (Absolute Return UCITS (ARUs)) and other hedge funds. We demonstrate that hedge funds have more suspicious patterns in their reported returns than ARUs, which have stricter reporting rules. Inconsistent with the notion that UCITS rules reduce operational risk we find that ARUs are more exposed to operational risk measures and exhibit more external conflicts of interest than hedge funds. Although ARUs deliver lower risk-adjusted returns than other hedge funds on average, this difference disappears when we compare subsets of the two groups of domicile matched funds that have the same liquidity or share restrictions. Leverage and margin constraints are less binding for funds that impose tight share restrictions, and thereby, these funds tend to have more exposure to betting-against-beta factor. Finally, we find that there are limits to the ability of investors to exploit the superior liquidity of ARUs through portfolio rebalancing since they exhibit lower
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