Derivatives Use
Derivatives Use, Trading & Regulation (2006) 12, 190–199. doi:10.1057/palgrave.dutr.1850039
Time lags in fund of funds
Practical applications
Net asset value (NAV) of funds of funds (FoF) is based on the underlying funds NAVs. Due to the time of publication of the underlying funds NAVs as well as the underlying funds relating to different markets with different closing times, the NVA of FoF includes time lags and is therefore producing some noise. This noise makes it difficult to correctly estimate tracking error (TE). To minimise the impact of time lags, the authors suggest a measure to adjust the TE considering the problem of non-synchronous data. The paper constitutes an appropriate reading for risk managers as well as for investors needing to compare risk relevant factors using TE (ie information ratio) of funds of funds.
Christine Louargant1, Luc Neuberg2 and Virginie Terraza3
Correspondence: Christine, Louargant, Grefige-Ceremo, Université Paul Verlaine de Metz, IUT de Metz, Ile du Saulcy, 57045 METZ cedex 1, France. Tel: +33 3 87 31 51 70, Fax: +33 3 87 31 51 72, E-mail: christine.louargant@univ-metz.fr
1Christine Louargant is an assistant professor of finance and accounting at the University Paul Verlaine of Metz and researcher in Grefige-Ceremo. Her main research interests are financial risks, exchange rate dynamics and financial markets.
2Luc Neuberg is Managing Director of Fortis Investments Luxembourg and Risk Manager of Fortis Multi-Management. His research area concerns financial risks, asset allocation and agent-based modelling.
3Virginie Terraza is an assistant professor of finance at the University of Luxembourg and researcher in Luxembourg School of Finance (LSF). Her principal research centres relate to the analysis of the financial risks, portfolio management and financial econometrics.
Received 29 August 2006; Revised 29 August 2006.
Abstract
The purpose of this paper is to analyse the impact upon tracking errors (TEs) of time lags in the calculation of fund of funds (FoF) net asset value (NAV). We examine how microstructure effects produce noise in the NAV of FoF and therefore noise in the TE. For that, we use simulations to calculate FoF NAVs at different closing dates. We then compare series of TEs to analyse the impact of time lags and formalise a relation adjusting the TE including error terms in the ratio.
Keywords:
fund of funds, NAV calculation, time lags, tracking error
