A Model of Emulation Funds

Abstract

Emulation funds are a potentially cost-effective way for multi-manager funds to improve their investment performance by delaying and netting trade signals from underlying managers. We develop a model to represent the expected sources of differential performance in an emulation fund relative to its underlying multi-manager portfolio. The model formalises the expected interaction between potential savings and opportunity costs, and allows us to observe complexities in the emulation process that are hidden without a benchmark. Finally, the functional representation of the model allows sensitivity analysis of the emulation fund to key parameters, and enables us to determine theoretically optimal lag periods.

Keywords: multi-manager, fund-of-funds, transaction costs, emulation funds

JEL Classification: G23