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

51 Pages Posted: 14 May 2011

Date Written: May 11, 2011

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.

Keywords: Minimax Filter, Hedge Fund Replication, Alternative Beta, Robust Methodology, Detection of Non Linearities

JEL Classification: G00, C60

Suggested Citation

Weisang, Guillaume, A Robust Approach to Misspecifications and Non Linearities for Hedge Fund Replication and Alternative Beta (May 11, 2011). Available at SSRN: https://ssrn.com/abstract=1652187 or http://dx.doi.org/10.2139/ssrn.1652187

Guillaume Weisang (Contact Author)

affiliation not provided to SSRN

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