Generating a target payoff distribution with the cheapest dynamic portfolio: an application to hedge fund replication

This paper provides a new method for constructing a dynamic optimal portfolio for asset management. This method generates a target payoff distribution using the cheapest dynamic trading strategy. As a practical example, the method is applied to hedge fund replication. This dynamic portfolio strategy is regarded as an extension of a hedge fund replication methodology that was developed by Kat and Palaro and Papageorgiou <italic>et al</italic>. to address multiple trading assets with both long and short positions. Empirical analyses show that such an extension significantly improves the performance of replication in practice.