A New Hedge Fund Replication Method with the Dynamic Optimal Portfolio

Global Journal of Business Research, Vol. 4, No. 4, pp. 23-34, 2010

Posted: 30 Mar 2010 Last revised: 11 Dec 2010

See all articles by Akihiko Takahashi

Akihiko Takahashi

University of Tokyo - Faculty of Economics

Kyo Yamamoto

GCI Asset Management, Inc.

Date Written: March 16, 2010

Abstract

This paper provides a new hedge fund replication method, which extends Kat and Palaro (2005) and Papageorgiou, Remillard and Hocquard (2008) to multiple trading assets with both long and short positions. The method generates a target payoff distribution by the cheapest dynamic portfolio. It is regarded as an extension of Dybvig (1988) to continuous-time framework and dynamic portfolio optimization where the dynamic trading strategy is derived analytically by applying Malliavin calculus. It is shown that the cost minimization is equivalent to maximization of a certain class of von Neumann-Morgenstern utility functions. The method is applied to the replication of a CTA/Managed Futures Index in practice.

Keywords: Hedge Fund Replication, Dynamic Portfolio Optimization, Martingale Method, Malliavin Calculus

JEL Classification: G11, G20, G23

Suggested Citation

Takahashi, Akihiko and Yamamoto, Kyo, A New Hedge Fund Replication Method with the Dynamic Optimal Portfolio (March 16, 2010). Global Journal of Business Research, Vol. 4, No. 4, pp. 23-34, 2010, Available at SSRN: https://ssrn.com/abstract=1578566

Akihiko Takahashi

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

Kyo Yamamoto (Contact Author)

GCI Asset Management, Inc. ( email )

12F Chiyoda First Bldg. East
3-8-1 Nishi-Kanda
Chiyoda-ku, Tokyo 101-0065
Japan

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