IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Tracking problems, hedge fund replication and alternative beta

  • Roncalli, Thierry
  • Weisang, Guillaume

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 faced many critics. In this paper, we consider three of the main critiques, namely the lack of reactivity of hedge fund replication and its deficiency in capturing tactical allocations; its failure to apprehend non-linear positions of the underlying hedge fund industry and higher moments of hedge fund returns; and, finally, 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 linear Gaussian model as a basis for discussion, we provide the reader with an intuition for the inner tenets of the Kalman filter and illustrate the results' sensitivity to the algorithm specification choices. This part of the paper includes considerations on the type of strategies which can be replicated, as well as the problem of selecting factors. We then apply more advanced Bayesian filters' algorithms, known as particle filters, to capture the non-normality and non-linearities documented on hedge fund returns. 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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://mpra.ub.uni-muenchen.de/37358/1/MPRA_paper_37358.pdf
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37358.

as
in new window

Length:
Date of creation: 24 Dec 2008
Date of revision:
Handle: RePEc:pra:mprapa:37358
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de

More information through EDIRC

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. 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.
  2. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Roncalli, Thierry & Teiletche, Jérôme, 2008. "An Alternative Approach to Alternative Beta," Journal of Financial Transformation, Capco Institute, vol. 24, pages 43-52.
  8. 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.
  9. Fung, William & Hsieh, David A., 1999. "A primer on hedge funds," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 309-331, September.
Full references (including those not matched with items on IDEAS)

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

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:37358. 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: (Ekkehart Schlicht)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.