Regular(Ized) Hedge Fund Clones

Posted: 12 Feb 2009 Last revised: 8 Oct 2010

See all articles by Daniel Giamouridis

Daniel Giamouridis

Bank of America - Bank of America Merrill Lynch; Athens University of Economics and Business; City University London - Cass Business School - Faculty of Finance; EDHEC Risk Institute

Sandra Paterlini

University of Trento - Department of Economics and Management

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Date Written: November 5, 2009

Abstract

This article addresses the problem of portfolio construction in the context of efficient hedge fund investments replication. We propose a modification to the standard à la Sharpe “style analysis” by introducing a constraint on the asset weights 1-norm and 2-norm. This constraint regularizes the optimization problem, allows efficient selection of relevant factors - especially among a set of correlated factors - and has significant effects on the stability of the resulting asset mix and the risk-return characteristics of the replicating portfolio. The empirical results suggest that the norm-constrained replicating portfolios exhibit significant correlations with their benchmarks, often higher than 0.9; have a fraction, that is about half to two thirds, of active positions relative to those determined through the standard method; and are obtained with turnover, which is in some instances about one fourth of that for the standard method.

Keywords: Hedge Funds, Replication, Portfolio Management, Index Tracking, Norm-constrained portfolios

JEL Classification: G11, G12, C00

Suggested Citation

Giamouridis, Daniel and Paterlini, Sandra, Regular(Ized) Hedge Fund Clones (November 5, 2009). Journal of Financial Research, Vol. 33, No. 3, pp. 223-247, September 2010. Available at SSRN: https://ssrn.com/abstract=1500325

Daniel Giamouridis (Contact Author)

Bank of America - Bank of America Merrill Lynch ( email )

United Kingdom

Athens University of Economics and Business ( email )

Department of Accounting and Finance
Greece

City University London - Cass Business School - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

EDHEC Risk Institute ( email )

Lille
France

Sandra Paterlini

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

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