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

60 Pages Posted: 25 Oct 2013

See all articles by Clemens Sialm

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

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: October 2013

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 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 local contagion. Overall, our results suggest that while local funds of funds benefit from local performance advantages, their local bias creates market segmentation that could destabilize financial markets.

Suggested Citation

Sialm, Clemens and Sun, Zheng and Zheng, Lu, Home Bias and Local Contagion: Evidence from Funds of Hedge Funds (October 2013). NBER Working Paper No. w19570. Available at SSRN: https://ssrn.com/abstract=2345065

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

AQR Capital Management, LLC ( email )

Greenwich, CT
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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