Emulation funds may be no better than those they track, once the opportunity cost of missed short-term returns is factored in, research has found.
The funds promise lower costs for multi-manager funds by reducing trading activity and delaying trading decisions by individual fund managers.
But the gain in cost-saving is often offset by the loss of short-term trading profits, according to the Capital Markets Cooperative Research Centre (CMCRC), which tracked the funds over four years.
“One of the biggest pitfalls of emulation is that it fails to exploit the short-lived information value of the original trade signal,” Zhe Chen, CMCRC PhD Candidate from the Macquarie Graduate School of Management said.
“This leads to significant losses that appear to outweigh the benefits of reduced transaction costs.”
However, the research found emulation funds could be more beneficial given a longer lag, with the gains from lower transaction costs more likely to amount to real savings over an extended period of time.
