Advanced Search
MyIDEAS: Login to save this article or follow this journal

Tracking Problems, Hedge Fund Replication, and Alternative Beta

Contents:

Author Info

  • Roncalli, Thierry

    ()
    (Lyxor Asset Management)

  • Weisang, Guillaume

    ()
    (Bentley University)

Abstract

As hedge fund replication based on factor models has encountered growing interest among professionals and academics, and despite the launch of numerous products (indexes and mutual funds) in the past year, it has faced many critics. In this paper, we consider two of the main critiques, namely the lack of reactivity of hedge fund replication, its deficiency in capturing tactical allocations, and the lack of access to the alpha of hedge funds. To address these problems, we consider hedge fund replication as a general tracking problem which may be solved by means of Bayesian filters. Using the example provided by Roncalli and Teiletche (2008), we detail how the Kalman filter tracks changes in exposures, and show that it provides a replication methodology with a satisfying economic interpretation. Finally, we address the problem of accessing the pure alpha by proposing a core/satellite approach of alternative investments between high-liquid alternative beta and less liquid investments. Non-normality and non-linearities documented on hedge fund returns are investigated using the same framework in a companion paper [Roncalli and Weisang (2009)].

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 31 (2011)
Issue (Month): ()
Pages: 19-29

as in new window
Handle: RePEc:ris:jofitr:1453

Contact details of provider:
Postal: 120 Broadway, 29th Floor New York, NY 10271
Phone: +1 212 284 8600
Email:
Web page: http://www.capco.com/

Related research

Keywords: Tracking problem; hedge fund replication; alternative beta; global tactical asset allocation; Bayes filter; Kalman filter; particle filter; alpha.;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Antonio Diez De Los Rios & René Garcia, 2011. "Assessing and valuing the nonlinear structure of hedge fund returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(2), pages 193-212, March.
  2. Merton, Robert C, 1981. "On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts," The Journal of Business, University of Chicago Press, vol. 54(3), pages 363-406, July.
  3. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
  4. Roncalli, Thierry & Teiletche, Jérôme, 2008. "An Alternative Approach to Alternative Beta," Journal of Financial Transformation, Capco Institute, vol. 24, pages 43-52.
  5. Amin, Gaurav S. & Kat, Harry M., 2003. "Hedge Fund Performance 1990–2000: Do the “Money Machines” Really Add Value?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(02), pages 251-274, June.
  6. Fung, William & Hsieh, David A., 1999. "A primer on hedge funds," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 309-331, September.
  7. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
  8. Fung, W. & Hsieh, D A., 2007. "Hedge fund replication strategies: implications for investors and regulators," Financial Stability Review, Banque de France, issue 10, pages 55-66, April.
  9. Arnaud Doucet & Vladislav Tadić, 2003. "Parameter estimation in general state-space models using particle methods," Annals of the Institute of Statistical Mathematics, Springer, vol. 55(2), pages 409-422, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Sam Nasypbek & Scheherazade S Rehman, 2011. "Explaining the returns of active currency managers," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 211-256 Bank for International Settlements.
  2. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2013. "On the Stratonovich – Kalman - Bucy filtering algorithm application for accurate characterization of financial time series with use of state-space model by central banks," MPRA Paper 50235, University Library of Munich, Germany.
  3. Clauss, Pierre & Roncalli, Thierry & Weisang, Guillaume, 2009. "Risk Management Lessons from Madoff Fraud," MPRA Paper 36754, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ris:jofitr:1453. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Springett).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.