Regular(ized) hedge funds
Year: 2010
Type: article
Abstract: 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.
Author: Paterlini, Sandra
Institution: Athens University of Economics and Business
Language: English
Field: Decision Sciences
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3125590728