Paul Merage School of Business
University of California, Irvine
Irvine, CA 92617
NBER Working Papers and Publications
|October 2013||Home Bias and Local Contagion: Evidence from Funds of Hedge Funds|
with Clemens Sialm, Lu Zheng: w19570
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.