Does portfolio emulation outperform its target funds?

Zhe Chen*, F. Douglas Foster, David R. Gallagher, Adrian D. Lee

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

3 Citations (Scopus)


An emulation fund is designed to reduce trading activity, thereby lowering costs, for a multi-manager fund. It does this by delaying, and potentially combining, trading decisions from each employed fund manager to eliminate offsetting trades (e.g. one manager may buy a stock for her fund while another manager sells the same stock at approximately the same time for his fund). While lowering transaction costs is a key benefit of an emulation strategy, there has been little research that compares the reduction in transaction costs with the opportunity costs of delaying trade. Using reported equity trades for a large Australian pension fund, we simulate the consequences of an emulation strategy. We find that simulated emulation trades underperform those trades made by the employed (or target) fund over our sample period. That is, the opportunity cost of delayed trading significantly outweighs transaction cost reductions. Overall, we do not find strong evidence to support emulation from a cost-benefit perspective before management fees and taxes.

Original languageEnglish
Pages (from-to)401-427
Number of pages27
JournalAustralian Journal of Management
Issue number2
Publication statusPublished - Aug 2013
Externally publishedYes


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