University of Oulu

Juha Joenväärä, Bernd Scherer, Frictional diversification costs: Evidence from a panel of fund of hedge fund holdings, Journal of Empirical Finance, Volume 52, 2019, Pages 92-111, ISSN 0927-5398, https://doi.org/10.1016/j.jempfin.2019.01.011

Frictional diversification costs : evidence from a panel of fund of hedge fund holdings

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Author: Joenväärä, Juha1; Scherer, Bernd2,3
Organizations: 1University of Oulu, Department of Finance Linnanmaa Campus P.O. Box 8000, FI-90014, Finland
2Geschäftsführer, Bankhaus Lampe Jägerhofstr 10, 40479, Düsseldorf, Germany
3EDHEC, France
Format: article
Version: accepted version
Access: embargoed
Persistent link: http://urn.fi/urn:nbn:fi-fe2019061320360
Language: English
Published: Elsevier, 2019
Publish Date: 2021-02-20
Description:

Abstract

We analyze the diversification choices of fund of funds (FoF). Diversification is not a free lunch — not available for every FoF. Instead we find a positive log-linear relation between the number of constituent funds in a fund of hedge fund (\(n\)) and the respective assets under management, (\(AuM\)). More precisely it takes the form: \(n^2 \propto AuM\). This relation is consistent with the predictions from a model of naïve diversification with frictional diversification costs such as due diligence costs. Finally, we demonstrate that individual FoFs diversifying more in line with our model’s predictions deliver superior performance and fail less likely.

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Series: Journal of empirical finance
ISSN: 0927-5398
ISSN-E: 1879-1727
ISSN-L: 0927-5398
Volume: 52
Pages: 92 - 111
DOI: 10.1016/j.jempfin.2019.01.011
OADOI: https://oadoi.org/10.1016/j.jempfin.2019.01.011
Type of Publication: A1 Journal article – refereed
Field of Science: 512 Business and management
Subjects:
Copyright information: © 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.
  https://creativecommons.org/licenses/by-nc-nd/4.0/