Macquarie University
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Emulation funds and mutual fund trading behaviour

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posted on 2022-03-28, 22:16 authored by Zhe Chen
In this dissertation, I examine the efficacy of emulation strategies in both empirical and theoretical contexts, and thoroughly investigate one of the most important underlying factors in determining the effectiveness of emulation funds - the behavioural trading patterns of active fund managers. This research is driven by both increasing commercial interest in emulation products as they become more widespread (a number of providers including MLC, Russell Investments and NAB now offer portfolio emulation products), and a genuine academic interest in understanding the factors that drive their complex investment structures. Furthermore, the high-frequency analysis of active fund manager trading patterns is a significant topic in its own right, and represents an aspect of the fund manager performance literature that has previously been constricted by limited access to high granularity fund-level transactions data. In the first study, "Does Portfolio Emulation Outperform Its Target Funds?", I find that, while small but economically significant reductions to transaction costs do arise from emulation, the opportunity costs associated with altering the timing of trades significantly outweigh the benefits. The second study, "A Model of Emulation Funds", constructs a model of emulation fund cash flows. This model formalises the interaction between the marginal transaction costs savings and the performance impact of altered trade timing, enables forecasts of emulation fund performance based on forward-looking expectations, and allows numerical optimisation of key emulation fund parameters. The final study, "A Fourfold Pattern to the Art of Active Investing", examines the motivation behind observed trading patterns by mutual fund managers, and provides insight into how we can potentially design a more efficient emulation strategy.


Table of Contents

1. Introduction -- 2. Literature review -- 3. Does portfolio emulation outperform its target funds? -- 4. A model of emulation funds -- 5. A fourfold pattern to the art of active investing -- 6. Conclusions and future research directions.


"30th August 2013 Includes bibliographical references A dissertation submitted in fulfilment of the requirements for the degree of Doctor of Philosophy"

Awarding Institution

Macquarie University

Degree Type

Thesis PhD


PhD, Macquarie University, Macquarie Graduate School of Management

Department, Centre or School

Macquarie Graduate School of Management

Year of Award


Principal Supervisor

David Gallagher

Additional Supervisor 1

F. Douglas Foster


Copyright Zhe Chen 2013 Copyright disclaimer:




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