Home Bias and Local Contagion: Evidence from Funds of Hedge Funds

Our 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 overweigh their investments in hedge funds located in the same geographical areas and that funds with a stronger local bias exhibit superior performance. Local bias also gives rise to excess flow comovement and extreme return clustering within geographic areas. Overall, our results suggest that while funds of funds benefit from local advantages, their local bias also creates market segmentation that can destabilize the underlying hedge funds.

The ABCs of fund finance: credit facilities for secondaries funds and funds of funds

Purpose To review and analyze the key structural considerations secondaries funds and funds of funds must consider when negotiating credit facilities secured by limited partnership (LP) interests. Design/methodology/approach This article provides an overview of the primary issues that arise with credit facilities secured by LP interests. These issues include the ability to provide a perfected security interest in LP interests, understanding a credit facility’s borrowing base and advance rates, and the potential impact of certain types of events of default. Findings Secondaries funds and funds of funds have raised significant amounts of equity capital in recent years. These funds acquire portfolios of LP interests and are increasingly deploying leverage to amplify the returns of these portfolios and provide these funds with a limited degree of liquidity. The leverage is secured by the LP interests. The credit facilities that the funds are structuring and negotiating present a host of issues unique to this type of fund finance. Provided the facilities are properly structured and negotiated, secondaries funds and funds-of-funds borrowers will be able to use these facilities to help meet investment-return objectives and address important portfolio-management needs. Practical implications Secondaries funds and funds of funds can benefit from leverage secured by their portfolios of LP interests. This article provides a road map for borrowers when structuring and negotiating these credit facilities. Originality/value Practical analysis from a premier corporate law firm on the issues presented by the increasing use of credit facilities by secondaries funds and funds of funds.