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REGULAR(IZED) HEDGE FUND CLONES
Author(s) -
Giamouridis Daniel,
Paterlini Sandra
Publication year - 2010
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2010.01269.x
Subject(s) - portfolio , returns based style analysis , hedge fund , sharpe ratio , econometrics , economics , asset allocation , norm (philosophy) , actuarial science , mutual fund separation theorem , mathematical optimization , computer science , capital asset pricing model , mathematical economics , microeconomics , mathematics , financial economics , fund of funds , finance , fund administration , incentive , political science , law
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.