Equity hedge funds are thought to effectively operate market timing by implementing switching strategies conditional on market circumstances. In this paper we use only the reported monthly returns on a set of funds to infer the type of switching strategies they follow, if any, as well as their...

In the field of optimisation models for passive investments, we propose a general portfolio construction model based on principal component analysis. The portfolio is designed to replicate the first principal component of a group of stocks, instead of a traditional benchmark, thus capturing only...

We present a detailed study of portfolio optimisation based on cointegration, a statistical tool that here exploits a long-run equilibrium relationship between stock prices and an index price. We compare the theoretical and empirical properties of cointegration optimal equity portfolios with...

With institutional investors increasingly involved in alternative investments, portfolio optimisation within a large universe of hedge funds has become a key area for research. This paper develops a portfolio construction model that is specifically designed for funds of hedge funds,...

This paper examines, from a market efficiency perspective, the performance of a simple dynamic equity indexing strategy based on cointegration. A consistent 'abnormal' return in excess of the benchmark is demonstrated over different time horizons and in different real world and simulated stock...

Carol Alexander and Anca Dimitriu discuss two strategies for enhanced index tracking designed to best suit a passive investment framework.

This paper presents two applications of cointegration based trading strategies: a classic index tracking strategy and a long-short equity market neutral strategy. As opposed to other traditional index tracking or long-short equity strategies, the portfolio optimisation is based on cointegration...

Different theoretical and numerical methods for calculating the fair-value of a variance swap give rise to systematic biases that are most pronounced during volatile periods. For instance, differences of 10-20 percentage points would have been observed on fair-value index variance swap rates...

Most research on option hedging has compared the performance of delta hedges derived from different stochastic volatility models with Black-Scholes-Merton (BSM) deltas, and in particular with the `implied BSM’ model in which an option’s delta is based on its own market implied volatility....

Conditional returns distributions generated by a GARCH process, which are important for many problems in market risk assessment and portfolio optimization, are typically generated via simulation. This paper extends previous research on analytic moments of GARCH returns distributions in several...