A Robust Approach to Misspecifications and Non Linearities for Hedge Fund Replication and Alternative Beta

Abstract:     
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, C60

working papers series