Home Bias and Local Contagion: Evidence from Funds of Hedge Funds
60 Pages
Posted: 17 Mar 2012
Last revised: 12 Feb 2014
University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)
University of California, Irvine - Paul Merage School of Business
University of California, Irvine - Paul Merage School of Business
There are 2 versions of this paper
Date Written: February 11, 2014
Abstract
This 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 of hedge funds with a stronger local bias exhibit superior performance. However, this local bias of funds of funds adversely impacts the hedge funds by creating excess comovement and contagion within geographic areas. Overall, our results suggest that while funds of funds benefit from local advantages, their local bias creates market segmentation that could destabilize financial markets.
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 (February 11, 2014). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023851 or http://dx.doi.org/10.2139/ssrn.2023851
