A New Hedge Fund Replication Method With The Dynamic Optimal Portfolio

Akihiko Takahashi and Kyo Yamamoto
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Akihiko Takahashi: Faculty of Economics, University of Tokyo
Kyo Yamamoto: Graduate School of Economics, University of Tokyo

No CARF-F-211, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

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. It is regarded as an extension of Dybvig (1988) to continuous-time framework and dynamic portfolio optimization where the dynamic trading strategy is derived analytically by applying Malliavin calculus. It is shown that the 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.

Pages: 19 pages
Date: 2010-03
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Citations: View citations in EconPapers (2)

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