A Model of Emulation Funds

47 Pages Posted: 19 Sep 2013

See all articles by Zhe Chen

Zhe Chen

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

F. Douglas Foster

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

David R. Gallagher

Bond University

Adrian D. Lee

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

Date Written: September 12, 2013

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

Suggested Citation

Chen, Zhe and Chen, Zhe and Foster, F. Douglas and Gallagher, David R. and Lee, Adrian D., A Model of Emulation Funds (September 12, 2013). FIRN Research Paper, Available at SSRN: https://ssrn.com/abstract=2327368 or http://dx.doi.org/10.2139/ssrn.2327368

Zhe Chen (Contact Author)

University of New South Wales (UNSW)

Kensington
High St
Sydney, NSW 2052
Australia

Acadian Asset Management ( email )

260 Franklin Street
Boston, MA 02110
United States

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

Bond University ( email )

Centre for Data Analytics, Bond Business School
Gold Coast, QLD 4229
Australia

Adrian D. Lee

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

70 Elgar Road
Melbourne, VIC 3125
Australia

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