This is regarding the results of the payoff distribution approach methodology. CAIA Level 2 current & integrated topics on page 44 states ‘the payoff distribution approach, while insightful and found to generate relatively satisfying results on an out of sample basis, unfortunately cannot be regarded…’ Schweser on p81 (current & integrated topics) states ‘Out of sample R2 and correlations between HF index and clones were typically low’. So what will it be regarding the results of pay off distribution approach - generally relatively satisfying results on out of sample basis or out of sample R2 was low? I guess I should go with the original text but still… Secondly, is anyone going into the details & results of both the methods (particularly pay off distribution). Since I could not really make head or tail of this I was thinking of giving the finer details a pass?
I think the key here is the original text said “unfortunately cannot be regarded…” which I would take to mean passive hedge fund replication does not work well. It produce interesting results but can’t be relied on. Uppermark takes the same stance in interpreting the CAIA text. Which also support the original text. I may or may not look at the details.
I dont know if this will have an impact on the final representation on the test, but I manage a hedge fund replication index fund (mutual fund structure), and I can tell you that nobody takes Payoff Distribution seriously. Every I-bank and every indexer is using a factor approach, and I have only heard of one person who does payoff distribution - with no aum to speak of.
Thanks Philbak. Always good to get a real world perspective on what we are studying.