Hedge Fund Replication: A Model Combination Approach

Review of Finance, Forthcoming

48 Pages Posted: 25 Jan 2015 Last revised: 21 Jun 2016

See all articles by Michael S. O'Doherty

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance

N. Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics

Ashish Tiwari

University of Iowa

Date Written: June 17, 2016

Abstract

Recent years have seen increased demand from institutional investors for passive replication products that track the performance of hedge fund strategies using liquid investable assets such as futures contracts. In practice, linear replication methods suffer from poor tracking performance and high turnover. We propose a model combination approach to index replication that pools information from a diverse set of pre-specified factor models. Compared to existing methods, the pooled clone strategies yield consistently lower tracking errors, generate less severe portfolio drawdowns, and require substantially smaller trading volume. The pooled hedge fund clones also provide economic benefits in a portfolio allocation context.

Keywords: Hedge funds, Model pooling, Model combination, Hedge fund replication, Log score

JEL Classification: C11, C51, C53, C58, G17

Suggested Citation

O'Doherty, Michael S. and Savin, Nathan Eugene and Tiwari, Ashish, Hedge Fund Replication: A Model Combination Approach (June 17, 2016). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2554686 or http://dx.doi.org/10.2139/ssrn.2554686

Michael S. O'Doherty (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

Robert J. Trulaske, Sr. College of Business
401 Cornell Hall
Columbia, MO 65211
United States

Nathan Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

108 Pappajohn Building
Iowa City, IA 52242
United States
319-335-0855 (Phone)

Ashish Tiwari

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business, 108 PBB
Iowa City, IA 52242
United States
(319) 353-2185 (Phone)
(319) 335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/atiwari

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