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

60 Pages Posted: 17 Mar 2012 Last revised: 12 Feb 2014

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)

Zheng Sun

University of California, Irvine - Paul Merage School of Business

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Multiple version iconThere 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

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

Clemens Sialm (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Zheng Sun

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

Lu Zheng

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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