Portfolio optimisation for a Fund of Hedge Funds (“FoHF”) has to address the asymmetric, non-Gaussian nature of the underlying returns distributions. Furthermore, the objective functions and constraints are not necessarily convex or even smooth. Therefore traditional portfolio optimisation methods such as mean-variance optimisation are not appropriate for such problems and global search optimisation algorithms could serve better to address such problems. Also, in implementing such an approach the goal is to incorporate information as to the future expected outcomes to determine the optimised portfolio rather than optimise a portfolio on historic performance. In this paper, we consider the suitability of global search optimisation algorithms applied to FoHF portfolios, and using one of these algorithms to construct an optimal portfolio of investable hedge fund indices given forecast views of the future and our confidence in such views.
August 2009; International Asset Management Ltd, 7 Clifford Street, London W1S 2FT, UK; School of Mathematical and Physical Sciences, Sussex University, Brighton BN1 9RF, UK