CIRJE-F-726 "A New Hedge Fund Replication Method with the Dynamic Optimal Portfolio"
Author Name Takahashi, Akihiko and Kyo Yamamoto
Date March 2010
Full Paper PDF file
Remarks @@Forthcoming in Global Journal of Business Research, Vol. 4(4), pp. 23-34, 2010.

This paper provides a new hedge fund replication method, which extends Kat and Palaro (2005) and Papageorgiou, Remillard and Hocquard (2008) to multiple trading assets with both long and short positions. The method generates a target payoff distribution by the cheapest dynamic portfolio. It is regarded as an extension of Dybvig (1988) to continuous-time framework and dynamic portfolio optimization where the dynamic trading strategy is derived analytically by applying Malliavin calculus. It is shown that the cost minimization is equivalent to maximization of a certain class of von Neumann-Morgenstern utility functions. The method is applied to the replication of a CTA/Managed Futures Index in practice.