Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: An Application to Hedge Fund Replication

Akihiko Takahashi and Kyo Yamamoto
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Akihiko Takahashi: Graduate School of Economics, The University of Tokyo, Tokyo
Kyo Yamamoto: GCI Asset Management, Inc

No CARF-F-308, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper provides a new method to construct 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 (2005a, b) and Papageorgiou, Remillard and Hocquard (2008) 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.

Pages: 39 pages
Date: 2009-06, Revised 2013-02
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf308

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