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A New Hedge Fund Replication Method with the Dynamic Optimal Portfolio

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Author Info

  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

  • Kyo Yamamoto

    (Graduate School of Economics, University of Tokyo)

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    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.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2010/2010cf726.pdf
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    Bibliographic Info

    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-726.

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    Length: 19pages
    Date of creation: Mar 2010
    Date of revision:
    Handle: RePEc:tky:fseres:2010cf726

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    Cited by:
    1. Akihiko Takahashi & Kyo Yamamoto, 2009. "Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: An Application to Hedge Fund Replication," CIRJE F-Series CIRJE-F-624, CIRJE, Faculty of Economics, University of Tokyo.

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