Does Portfolio Emulation Outperform Its Target Funds?

Posted: 30 Jul 2013

See all articles by Zhe Chen

Zhe Chen

Acadian Asset Management; University of New South Wales (UNSW); Centre for International Finance and Regulation (CIFR)

F. Douglas Foster

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

David R. Gallagher

Rozetta Institute

Adrian D. Lee

Deakin University - Department of Finance (Property and Real Estate); Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: July 29, 2013

Abstract

An emulation fund is designed to reduce trading activity, thereby lowering costs, for a multi-manager fund. It does this by delaying, and potentially combining, trading decisions from each employed fund manager to eliminate offsetting trades (e.g. one manager may buy a stock for her fund while another manager sells the same stock at approximately the same time for his fund). While lowering transaction costs is a key benefit of an emulation strategy, there has been little research that compares the reduction in transaction costs with the opportunity costs of delaying trade. Using reported equity trades for a large Australian pension fund, we simulate the consequences of an emulation strategy. We find that simulated emulation trades underperform those trades made by the employed (or target) fund over our sample period. That is, the opportunity cost of delayed trading significantly outweighs transaction cost reductions. Overall, we do not find strong evidence to support emulation from a cost-benefit perspective before management fees and taxes.

Keywords: Brokerage, fund-of-funds, market impact, multi-manager, offsetting trades, portfolio emulation

Suggested Citation

Chen, Zhe and Foster, F. Douglas and Gallagher, David R. and Lee, Adrian D., Does Portfolio Emulation Outperform Its Target Funds? (July 29, 2013). Australian Journal of Management, Vol. 38, No. 2, 2013. Available at SSRN: https://ssrn.com/abstract=2302615

Zhe Chen (Contact Author)

Acadian Asset Management ( email )

260 Franklin Street
Boston, MA 02110
United States

University of New South Wales (UNSW)

Kensington
High St
Sydney, NSW 2052
Australia

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

F. Douglas Foster

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

David R. Gallagher

Rozetta Institute ( email )

Sydney

Adrian D. Lee

Deakin University - Department of Finance (Property and Real Estate) ( email )

70 Elgar Road
Melbourne, VIC 3125
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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