CIRJE-F-624 "Generating a Target Payoff Distribution with the Cheapest Dynamic Portfolio: An Application to Hedge Fund Replication"
Author Name Takahashi, Akihiko and Kyo Yamamoto
Date June 2009
Full Paper PDF file
Remarks @Revised in March 2010 and February 2013; subsequently published (online) in Quantitative Finance 26, June 2013.

This paper provides a new method to construct a dynamic optimal portfolio for asset management. This method generates a target payoff distribution using the cheapest dynamic trading strategy. As a practical example, the method is applied to hedge fund replication. This dynamic portfolio strategy is regarded as an extension of a hedge fund replication methodology that was developed by Kat and Palaro (2005a, b) and Papageorgiou, Remillard and Hocquard (2008) to address multiple trading assets with both long and short positions. Empirical analyses show that such an extension significantly improves the performance of replication in practice.