Abstract:
Hedge fund strategies such as the equity market neutral have provided significant risk adjusted returns in the form of alpha, but their short selling and debt has made them generally costly and prone to failure under changing market conditions. There is a need to isolate the benefits of long short equity hedging without the added costs and dangers associated with short selling and leverage.
Isolating the set of lowest possible market beta long equity portfolios that can mimick long short equity hedging can provide investors cost effective hedge fund replication. A systematic procedure involving mean variance optimisation and quantitative analytical techniques was used to characterise the behaviour of targeted beta portfolios on key risk and return metrics and variables as a beta constraint was applied to optimisation on a finely calibrated scale of one down to zero.
This research was able to isolate a sample from the JSE/FTSE Top 40 Index into a solution set (P) of low beta portfolio alternatives extending from a target beta value of 0.475 to a beta value of 0.600 which was identified, characterised and disaggregated into definitive solution tuples P1 (beta 0.600, beta 0.575, beta 0.550) and P2 (beta 0.525, beta 0.500, beta 0.475).
