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Generating a target payoff distribution with the cheapest dynamic portfolio: an application to hedge fund replication

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  • Akihiko Takahashi
  • Kyo Yamamoto

Abstract

This paper provides a new method for constructing 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 and Papageorgiou et al . 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, 2013. "Generating a target payoff distribution with the cheapest dynamic portfolio: an application to hedge fund replication," Quantitative Finance, Taylor & Francis Journals, vol. 13(10), pages 1559-1573, October.
    • Handle: RePEc:taf:quantf:v:13:y:2013:i:10:p:1559-1573
    DOI: 10.1080/14697688.2013.779014
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