Factor-Based Hedge Fund Replication with Risk Constraints

Harris R.D.F., Mazibas M. (2012) Factor-Based Hedge Fund Replication with Risk Constraints. In: Gregoriou G.N., Kooli M. (eds) Hedge Fund Replication. Palgrave Macmillan, London

University of Exeter Business School Working Paper, 2011

20 Pages Posted: 27 Jul 2017

See all articles by Richard D. F. Harris

Richard D. F. Harris

University of Bristol, School of Accounting and Finance; University of Bristol, School of Accounting and Finance

Murat Mazibas

University of Dundee School of Business; Institute of Applied Mathematics; University of Exeter Business School

Date Written: May 2, 2011

Abstract

In this paper, we propose a method for hedge fund replication using a factor-based model supplemented with a series of risk and return constraints that implicitly target all the moments of the hedge fund return distribution. We use the approach to replicate the monthly returns of ten broad hedge fund strategy indices, using long-only positions in ten equity, bond, foreign exchange, and commodity indices, all of which can be traded using liquid, investible instruments such as futures, options and exchange traded funds. In out-of-sample tests, our approach provides an improvement over the pure factor-based model, offering a closer match to both the return performance and risk characteristics of the hedge fund strategy indices.

Keywords: Hedge fund replication; Hedge fund portfolio optimization; CVaR; CDaR, Upper and lower partial moments.

JEL Classification: G23, G24,G11, C61, C63, C02

Suggested Citation

Harris, Richard D. F. and Mazibas, Murat, Factor-Based Hedge Fund Replication with Risk Constraints (May 2, 2011). Harris R.D.F., Mazibas M. (2012) Factor-Based Hedge Fund Replication with Risk Constraints. In: Gregoriou G.N., Kooli M. (eds) Hedge Fund Replication. Palgrave Macmillan, London, University of Exeter Business School Working Paper, 2011, Available at SSRN: https://ssrn.com/abstract=3008553

Richard D. F. Harris

University of Bristol, School of Accounting and Finance

United Kingdom

HOME PAGE: http://www.bristol.ac.uk/people/person/Richard-Harris-50ffa5fb-0e86-4458-8e8c-8dace6eb3435/

University of Bristol, School of Accounting and Finance

United Kingdom

HOME PAGE: http://www.bristol.ac.uk/people/person/Richard-Harris-50ffa5fb-0e86-4458-8e8c-8dace6eb3435/

Murat Mazibas (Contact Author)

University of Dundee School of Business ( email )

Dundee, Scotland DD1 4HN
United Kingdom

Institute of Applied Mathematics ( email )

Ankara, 06531
Turkey

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

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