Hedge Fund Replication: The Asymmetric Way

Posted: 10 Mar 2017

Date Written: August 1, 2012

Abstract

This article introduces the concept of asymmetric hedge fund replication based on the risk factor model approach. The presented methodology is founded on downside risk management and offers an enhancement of existing hedge fund replication techniques. From a conceptual perspective, asymmetric hedge fund replication enables investors to achieve superior risk-adjusted performance in cases in which precise target tracking is not imperative. Along with the introduction of the asymmetric hedge fund replication, a new classification framework of replication methodologies is discussed, in which the replication objective is the center point. The out-of-sample performance of the presented approach is examined in an exemplary empirical replication of two major hedge fund sector indices with a popular factor model setting used in previous studies. Finally, aMonte Carlo study is conducted in which the authors simulate hedge fund returns and examine the out-of-sample performance. The comparison to standard hedge fund replication reveals the characteristic risk-return profile of the asymmetric approach. In sum, the risk-adjusted performance increases at the cost of target replication accuracy.The results of the short study support all aspects of the authors’ conceptual hypothesis and justify more extensive investigations.

Keywords: Hedge Funds

JEL Classification: C20

Suggested Citation

Tancar, Roman and Poddig, Thorsten and Ballis-Papanastasiou, Panagiotis, Hedge Fund Replication: The Asymmetric Way (August 1, 2012). Journal of Alternative Investments, Vol. 15, No. 1, 2012, Available at SSRN: https://ssrn.com/abstract=2929953

Roman Tancar

Independent ( email )

Thorsten Poddig

University of Bremen ( email )

Universitaetsallee GW I
Bremen, D-28334
Germany

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