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Constructing Multi-Strategy Fund of Hedge Funds

Abstract

This paper aims to develop a systematic allocation methodology to combine multi-strategy hedge funds within a structure of fund of funds in a risk-controlled manner. This is particularly important since the traditional mean-variance optimization proves ineffective in addressing hedge fund return distributions that are asymmetric in nature. Moreover, unstable correlations among various hedge fund strategies also pose a challenge to a meaningful optimization to combine various hedge fund strategies. This paper attempts to suggest some practical ways to overcome both these obstacles

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