Optimisation of a Fund of Hedge Funds Portfolio Using Price Maximisation of Basket Options

Abstract

Optimisation in the context of portfolios of stocks and bonds have been researched in detail in extant literature. To cater to the evergrowing world of hedge funds, we develop a alternative method for optimisation of Fund of Hedge Fund portfolios, by replicating payoffs of a basket option. This methodology avoids the pitfalls of current portfolio optimisation techniques This methodology has specific implications and applicability especially in optimisation of thematic Fund of Hedge Funds portfolios.

Keywords: Hedge Funds, Portfolio Optimisation, Fund of Hedge Funds, Option Pricing

JEL Classification: G11, G12, G19, G29