Applying a Global Optimisation Algorithm to Fund of Hedge Funds Portfolio Optimisation
23 Pages Posted: 18 Aug 2009 Last revised: 2 Sep 2009
Date Written: August 18, 2009
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: Suggested Citation