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A New Hedge Fund Replication Method with the Dynamic Optimal Portfolio

Author

Listed:
  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

  • Kyo Yamamoto

    (Graduate School of Economics, University of Tokyo)

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.

Suggested Citation

  • Akihiko Takahashi & Kyo Yamamoto, 2010. "A New Hedge Fund Replication Method with the Dynamic Optimal Portfolio," CIRJE F-Series CIRJE-F-726, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2010cf726
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2010/2010cf726.pdf
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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," CARF F-Series CARF-F-308, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Feb 2013.
    2. 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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