| By: |
Manfred GILLI (University of Geneva and Swiss Finance Institute);
Enrico SCHUMANN (University of Geneva);
Gerda CABEJ (University of Geneva);
Jonela LULA (University of Geneva) |
| Abstract: |
Hedge funds offer desirable risk-return profiles; but we also find high
management fees, lack of transparency and worse, very limited liquidity (they
are often closed to new investors and disinvestment fees can be prohibitive).
This creates an incentive to replicate the attractive features of hedge funds
using liquid assets. We investigate this replication problem using monthly
data of CS Tremont for the period of 1999 to 2009. Our model uses historical
observations and combines tracking accuracy, excess return, and portfolio
correlation with the index and the market. Performance is evaluated
considering empirical distributions of excess return, final wealth and
correlations of the portfolio with the index and the market. The distributions
are compiled from a set of portfolio trajectories computed by a resampling
procedure. The nonconvex optimization problem arising from our model
specification is solved with a heuristic optimization technique. Our
preliminary results are encouraging as we can track the indices accurately and
enhance performance (e.g. have lower correlation with equity markets). |
| Keywords: |
Hedge Funds, Hedge Fund Replication, Asset Allocation, Portfolio Optimization, Optimization Heuristics, Drawdown |
| JEL: |
G11 C61 C63 |
| Date: |
2010–06 |
| URL: |
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1022&r=fmk |