Hedge Fund Replication: A Model Combination Approach | Zendy

Michael S. O’Doherty | Zendy; N. E. Savin | Zendy; Ashish Tiwari | Zendy

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Hedge Fund Replication: A Model Combination Approach

Author(s) -

Michael S. O’Doherty,

N. E. Savin,

Ashish Tiwari

Publication year - 2016

Publication title -

review of finance

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1875-824X

pISSN - 1572-3097

DOI - 10.1093/rof/rfw037

Subject(s) - replication (statistics) , portfolio , hedge fund , context (archaeology) , futures contract , tracking error , computer science , business , actuarial science , econometrics , finance , economics , mathematics , artificial intelligence , biology , statistics , paleontology , control (management)

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 with 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.

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