A Robust Approach to Misspecifications and Non Linearities for Hedge Fund Replication and Alternative Beta
Clark University - Graduate School of Management
May 11, 2011
This paper explores a linear hedge fund replication and alternative beta methodology that is robust to the presence of non linearities and the possibility of model mis-specification. In a fashion similar to Roncalli and Weisang (2009a), the problem is cast as a tracking problem in order to allow for a dynamic treatment of the replication problem. In a quasi-experiment, using simulations, I explore the robustness of the methodology, and develop a statistic that helps in detecting the introduction of unmodeled components in hedge fund portfolios. Finally, the methodology is applied to a set of hedge fund indices.
Number of Pages in PDF File: 51
Keywords: Minimax Filter, Hedge Fund Replication, Alternative Beta, Robust Methodology, Detection of Non Linearities
JEL Classification: G00, C60working papers series
Date posted: May 14, 2011
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