We give an explicit algorithm and source code for combining alpha streams via bounded regression. In practical applications, typically, there is insufficient history to compute a sample covariance matrix (SCM) for a large number of alphas. To compute alpha allocation weights, one then resorts to...

We give a simple explicit formula for turnover reduction when a large number of alphas are traded on the same execution platform and trades are crossed internally. We model turnover reduction via alpha correlations. Then, for a large number of alphas, turnover reduction is related to the largest...

Fund-of-funds (FoF) managers face the task of selecting a (relatively) small number of hedge funds from a large universe of candidate funds. We analyse whether such a selection can be successfully achieved by looking at the track records of the available funds alone, using advanced statistical...

When it comes to allocating to traditional asset classes mean-variance optimization approach is usually satisfactory. However, naively extending this approach does not work when constructing strategic portfolios using alternative asset classes

This paper tests the risk reduction properties of hedge fund investing against a sample of stocks ranging from 1990 through 2014. GARCH dynamic conditional correlation analysis indicates that hedge funds are a significant diversifier due to the consistent imperfect relationship between the hedge...

In this paper, we propose a method for hedge fund replication using a factor-based model supplemented with a series of risk and return constraints that implicitly target all the moments of the hedge fund return distribution. We use the approach to replicate the monthly returns of ten broad hedge...

Diversification and low correlation are the primary reasons institutional investors cite for choosing toinclude hedge funds in a portfolio. However, there are a number of hidden biases in the reported returns which may overstate the attractiveness of hedge funds as an asset class.We review the...

Modeling a hedge fund's probability of failure by a dynamic logit regression, I document that a probability of fund failure has a significantly negative effect on the fund's future returns. A quintile portfolio with highest failure probability underperforms a quintile portfolio with lowest...