A model of emulation funds

Zhe Chen, F. Douglas Foster, David R. Gallagher, Adrian D. Lee

Research output: Contribution to journalArticlepeer-review

Abstract

Emulation funds are a potentially cost-effective way for multimanager 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 multimanager 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.

Original languageEnglish
Pages (from-to)717-748
Number of pages32
JournalAccounting and Finance
Volume55
Issue number3
DOIs
Publication statusPublished - 1 Sep 2015

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