This paper explores a linear hedge fund replication and alternative beta methodology that is robust to the presence of non linearities and the possibility of model mis-specification. In a fashion similar to Roncalli and Weisang (2009a), the problem is cast as a tracking problem in order to allow...

While the use of dynamic factor models for Hedge Fund Replication (HFR) has proven to be superior to standard OLS methodologies (e.g., Roncalli and Weisang, 2009a,b), current factor selection methodology in these dynamic settings by means of direct PCA-based estimation of the factors (e.g.,...

Portfolio construction and risk budgeting are the focus of many studies by academics and practitioners. In particular, diversification has spawn much interest and has been defined very differently. In this paper, we analyze a method to achieve portfolio diversification based on the decomposition...

As regulators around the world progress towards prudential reforms of the global financial system to address the issue of systemic risk, the sweeping scope of the task touches areas and actors of the financial markets that have typically not been seen as systemically important before. The idea...

In December 2008, as the financial and economic crisis continued on its devastating course, a new scandal bursts. After the 1998's failure of Long-Term Capital Management, Madoff's fraud brings once again the discredit on the hedge funds industry. This one is however of a different kind. Indeed,...

As hedge fund replication based on factor models has encountered growing interest among professionals and academics, and despite the launch of numerous products (indexes and mutual funds) in the past year, it faced many critics. In this paper, we consider three of the main critiques, namely the...