Regular(Ized) Hedge Fund Clones
AbstractAbstract This article addresses the problem of portfolio construction in the context of efficient hedge fund investments replication. We propose a modification to the standard Sharpe "style analysis" by introducing a constraint on the asset weights 1-norm and 2-norm. This constraint regularizes the optimization problem, allows efficient selection of relevant factor's and has significant effects on the stability of the resulting asset mix and the risk-return characteristics of the replicating portfolio. The empirical results suggest that the norm-constrained replicating portfolios exhibit significant correlations with their benchmarks, often higher than 0.9; have a fraction, which is about half to two-thirds, of active positions relative to those determined through the standard method; and are obtained with turnover, which is in some instances about one-fourth of that for the standard method. Copyright (c) 2010 The Southern Finance Association and the Southwestern Finance Association.
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Bibliographic InfoArticle provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.
Volume (Year): 33 (2010)
Issue (Month): 3 ()
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- Yen, Yu-Min & Yen, Tso-Jung, 2014. "Solving norm constrained portfolio optimization via coordinate-wise descent algorithms," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 737-759.
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