Generating a target payoff distribution with the cheapest dynamic portfolio: an application to hedge fund replication

Akihiko Takahashi and Kyo Yamamoto

Quantitative Finance, 2013, vol. 13, issue 10, 1559-1573

Abstract: This paper provides a new method for constructing a dynamic optimal portfolio for asset management. This method generates a target payoff distribution using the cheapest dynamic trading strategy. As a practical example, the method is applied to hedge fund replication. This dynamic portfolio strategy is regarded as an extension of a hedge fund replication methodology that was developed by Kat and Palaro and Papageorgiou et al . to address multiple trading assets with both long and short positions. Empirical analyses show that such an extension significantly improves the performance of replication in practice.

Date: 2013
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DOI: 10.1080/14697688.2013.779014

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