Applying a Global Optimisation Algorithm to Fund of Hedge Funds Portfolio Optimisation

23 Pages Posted: 18 Aug 2009 Last revised: 2 Sep 2009

Rishi Thapar

International Asset Management Limited

Bernard Minsky

Certior Advisors

Qi Tang

University of Sussex

Miodrag Obradovic

University of Sussex

Date Written: August 18, 2009

Abstract

Portfolio optimisation for a Fund of Hedge Funds (“FoHF”) has to address the asymmetric, non-Gaussian nature of the underlying returns distributions. Furthermore, the objective functions and constraints are not necessarily convex or even smooth. Therefore traditional portfolio optimisation methods such as mean-variance optimisation are not appropriate for such problems and global search optimisation algorithms could serve better to address such problems. Also, in implementing such an approach the goal is to incorporate information as to the future expected outcomes to determine the optimised portfolio rather than optimise a portfolio on historic performance.

In this paper, we consider the suitability of global search optimisation algorithms applied to FoHF portfolios, and using one of these algorithms to construct an optimal portfolio of investable hedge fund indices given forecast views of the future and our confidence in such views.

Keywords: portfolio optimisation, fund of hedge funds, global search optimisation, direct search, pgsl

JEL Classification: C15, C61, G11

Suggested Citation

THAPAR, RISHI and Minsky, Bernard and Tang, Qi and OBRADOVIC, Miodrag, Applying a Global Optimisation Algorithm to Fund of Hedge Funds Portfolio Optimisation (August 18, 2009). Available at SSRN: https://ssrn.com/abstract=1456821 or http://dx.doi.org/10.2139/ssrn.1456821

RISHI THAPAR (Contact Author)

International Asset Management Limited ( email )

London
United Kingdom

Bernard Minsky

Certior Advisors ( email )

8 Broadgates Avenue
Hadley Wood
Barnet, Herts EN4 0NU
United Kingdom
07748653625 (Phone)

HOME PAGE: http://www.certioradvisors.com

Qi Tang

University of Sussex ( email )

Dept of Mathematics
Sussex University
Falmer, Brighton, Sussex BNI 9RF
United Kingdom

Miodrag OBRADOVIC

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

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