Hedge Fund Returns: You Can Make Them Yourself!

Kat, Harry M.; Palaro, Helder P.

doi:10.2139/ssrn.800665

Cited by 11 publications

(16 citation statements)

References 3 publications

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“…Thus, their dependence structures on investors' stock and bond portfolios would also attract investors. The methodology proposed by Kat and Palaro (2005) can replicate this character in theory. Figure 2 shows the performances of CS/Tremont managed futures index and its clone based on their methodology.…”

Section: Introductionmentioning

confidence: 84%

“…However, an attractive character of the hedge fund returns is the low dependency on returns of traditional asset classes. Further, Kat and Palaro (2005) presented a modified method to replicate the dependence structure on the investor's existing portfolio, too. Kat and Palaro (2005) tried to replicate the return distribution of the target hedge fund and its dependence structure on an investor's existing portfolio through the dynamic trading of the investor's existing portfolio (proxied by a portfolio of stock index and bond futures) and another asset (replicating tool).…”

Section: Introductionmentioning

confidence: 99%

“…Further, Kat and Palaro (2005) presented a modified method to replicate the dependence structure on the investor's existing portfolio, too. Kat and Palaro (2005) tried to replicate the return distribution of the target hedge fund and its dependence structure on an investor's existing portfolio through the dynamic trading of the investor's existing portfolio (proxied by a portfolio of stock index and bond futures) and another asset (replicating tool). Papageorgiou et al (2008) proposed an alternative way to perform Kat-Palaro's replication methodology by utilizing a hedging scheme of options in an incomplete market.…”

Section: Introductionmentioning

confidence: 99%

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Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: An Application to Hedge Fund Replication

Takahashi

Yamamoto

2010

SSRN Journal

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This paper provides a new hedge fund replication method with the dynamic optimal portfolio. This is an extension of the methodology developed by Kat and Palaro (2005) and Papageorgiou, Remillard and Hocquard (2008) to multiple trading assets with both long and short positions. It is applied to the replication of CS/Tremont managed futures index, which performed very well even under the subprime and Lehman shocks. Empirical analyses show that the extension dramatically improves the replication performance in practice. Especially, the clone by multiple replicating tools enjoyed high returns under the credit crisis by controlling exposures efficiently, while the replica by the existing method incurred drawdown during the period. Moreover, the replication with an estimation method that reflects trend following strategy as the target brings correlated returns to the target.

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Section: Introductionmentioning

confidence: 84%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: An Application to Hedge Fund Replication

Takahashi

Yamamoto

2010

SSRN Journal

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“…At present, the replication methods are the Factor Approach (Fung and Hsieh, 1997), the Payoff Distribution Approach (Amin and Kat, 2003;Kat and Palaro, 2005) and the Mechanical Trading Rule Approach (Mitchell and Pulvino, 2001). For a detailed discussion of the various replication approaches, see Kat (2007).…”

Section: Introductionmentioning

confidence: 99%

Can typical households earn hedge fund returns? An analysis of the Eta® replication approach

Chong

Phillips²

2011

J Deriv Hedge Funds

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In this study, we present an extension to the literature on passive hedge fund replication and its applications by introducing the Eta model, and applying it to hedged mutual funds (HMFs) in an attempt to clone their cumulative returns and assessing the skills of fund managers. Although our replication methodology performed reasonably well for HMFs of certain trading strategies, the clones tend to outperform their respective HMFs, which suggest significant managerial influence that compromises fund performance. Finally, with the aid of the Eta model, we constructed a minimum economic risk portfolio, a long-only portfolio comprising exchange traded funds, with quarterly rebalancing, which nevertheless registered higher cumulative returns than funds with access to long/short strategies, leverage and derivatives. This augurs well for a typical household in that it is possible for them to earn hedge fund returns without hedge fund experience or expertise.

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“…In terms of hedge fund replication, the current literature focuses on two approaches: 1 moment matching and factor-based replication. Moment matching is thoroughly studied by Kat and Palaro (2005). Central to this approach is the conjecture that the return profile of an investment strategy can be replicated if its risk profile-that is, volatility, skewness, kurtosis, correlation to a specified portfolio-are matched.…”

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confidence: 99%

Regular(ized) Hedge Fund Clones

Giamouridis

Paterlini

2010

J of Financial Research

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This article addresses the problem of portfolio construction in the context of efficient hedge fund investments replication. We propose a modification to the standard Sharpe "style analysis" by introducing a constraint on the asset weights 1-norm and 2-norm. This constraint regularizes the optimization problem, allows efficient selection of relevant factor's and has significant effects on the stability of the resulting asset mix and the risk-return characteristics of the replicating portfolio. The empirical results suggest that the norm-constrained replicating portfolios exhibit significant correlations with their benchmarks, often higher than 0.9; have a fraction, which is about half to two-thirds, of active positions relative to those determined through the standard method; and are obtained with turnover, which is in some instances about one-fourth of that for the standard method. Copyright (c) 2010 The Southern Finance Association and the Southwestern Finance Association.

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Hedge Fund Returns: You Can Make Them Yourself!

Cited by 11 publications

References 3 publications

Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: An Application to Hedge Fund Replication

Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: An Application to Hedge Fund Replication

Can typical households earn hedge fund returns? An analysis of the Eta® replication approach

Regular(ized) Hedge Fund Clones

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