Research On Fund Families' Return Correlation Difference And Its Explanation

Alongside of the mushroom development of the fund industry in our country, the size of asset management companies is becoming larger and larger, and fund families have began to emerge. According to the recent investigation, the brand of asset management companies has become an important factor when choosing which to buy. To some extent, this implies a potential investment propensity:if an investor plans to hold more than one fund in his portfolio, he may choose to invest in the same fund family. This paper examines such propensity in terms of fund families'return correlation differenceFocusing on the correlation coefficient, for each investment objective pairs, we compute a correlation coefficient within the family and a correlation coefficient between the family and outside families. Based on four tests (simple t test, wilcoxon rank test, pair wise test, and binomial test), we find that the average correlation coefficient within the family is significantly higher than the correlation coefficient between the family and outside families. This shows that, to average extent, invest in a single fund family does not help to reduce un-systemic risk.Finally, the paper tries to explain the increased correlation coefficient within family from two aspects:the risk exposures and the common holdings. The results indicates similar risk exposures can explain more than 60% of the difference between the case within family and the case between families; for every lper increasing of the difference of common holdings, the correlation difference between the funds with the same family and the funds belonging to different family will increase 0.00125 (the hybrid-hybrid pair will increase additional 0.00133). This is consistent to our expectation.