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

Author

Listed:
  • Akihiko Takahashi

    (Graduate School of Economics, The University of Tokyo, Tokyo)

  • Kyo Yamamoto

    (GCI Asset Management, Inc)

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.

Suggested Citation

  • Akihiko Takahashi & Kyo Yamamoto, 2009. "Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: An Application to Hedge Fund Replication," CARF F-Series CARF-F-308, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Feb 2013.
    • Handle: RePEc:cfi:fseres:cf308
    as

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    File URL: https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/321.pdf
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    References listed on IDEAS

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