Home Bias and Local Contagion: Evidence from Funds of Hedge Funds

Sialm, Clemens; Sun, Zheng; Zheng, Lu

doi:10.2139/ssrn.2023851

Home Bias and Local Contagion: Evidence from Funds of Hedge Funds

AFA 2013 San Diego Meetings Paper

58 Pages Posted: 17 Mar 2012 Last revised: 14 Jul 2018

See all articles by Clemens Sialm

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Zheng Sun

University of California, Irvine - Paul Merage School of Business

Lu Zheng

University of California, Irvine - Paul Merage School of Business

There are 2 versions of this paper

Date Written: June 29, 2018

Abstract

Our paper analyzes the geographical preferences of hedge fund investors and the implication of these preferences for hedge fund performance. We find that funds of hedge funds overweight their investments in hedge funds located in the same geographical areas and that funds with a stronger local bias exhibit superior performance. This local bias also gives rise to excess flow comovement and extreme return clustering within geographic areas. Overall, our results suggest that while funds of funds benefit from local advantages, their local bias also creates market segmentation that can destabilize the underlying hedge funds.

Keywords: Hedge Funds, Funds of Funds, Home Bias, Informational Advantage, Contagion, Comovement

JEL Classification: G01, G11, G23

Suggested Citation: Suggested Citation

Sialm, Clemens and Sun, Zheng and Zheng, Lu, Home Bias and Local Contagion: Evidence from Funds of Hedge Funds (June 29, 2018). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023851 or http://dx.doi.org/10.2139/ssrn.2023851