A NEW HEDGE FUND REPLICATION METHOD WITH THE DYNAMIC OPTIMAL PORTFOLIO

Akihiko Takahashi and Kyo Yamamoto

Global Journal of Business Research, 2010, vol. 4, issue 4, 23-34

Abstract: This paper provides a new hedge fund replication method, which extends Kat and Palaro (2005) and Papageorgiou, Remillard and Hocquard (2008) to multiple trading assets with both long and short positions. The method generates a target payoff distribution by the cheapest dynamic portfolio. The work here extends the work of of Dybvig (1988) to a continuous-time framework and dynamic portfolio optimization where the dynamic trading strategy is derived analytically by applying Malliavin calculus. It is shown that cost minimization is equivalent to maximization of a certain class of von Neumann-Morgenstern utility functions. The method is applied to the replication of a CTA/Managed Futures Index in practice.

Keywords: Hedge Fund Replication; Dynamic Portfolio Optimization; Martingale Method; Malliavin Calculus (search for similar items in EconPapers)
JEL-codes: G11 G20 G23 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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