Working Paper: NBER ID: w19570
Authors: Clemens Sialm; Zheng Sun; Lu Zheng
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.
Keywords: Hedge Funds; Funds of Funds; Local Bias; Contagion; Performance
JEL Codes: G02; G11; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local bias (J15) | superior performance (D29) |
| local bias (J15) | market segmentation (M31) |
| local bias (J15) | increased comovement in returns among local hedge funds (G40) |
| local bias (J15) | higher probability of extreme return clustering during periods of distress (G01) |
| local outflows (F32) | local contagion (F65) |
| poor performance of local funds (G23) | likelihood of a hedge fund suffering a return in its bottom decile (G41) |