Abstract

http://ssrn.com/abstract=1362000
 
 

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Being Locked Up Hurts


Frans De Roon


Tilburg University - Department of Finance

Jinqiang Guo


Tilburg University, Department of Finance

Jenke Ter Horst


Tilburg University - Center for Economic Research (CentER)

November 12, 2009


Abstract:     
A lockup period for hedge funds restricts a multi-period investor’s ability to rebalance his portfolio and has non-trivial effects on the allocation decision and portfolio efficiency. Investors compensate for a hedge fund lockup period by making adjustments to their equity and bond holdings. Adding hedge funds with a lockup period to the portfolio of stocks and bonds generates large, negative hedge demands for stocks. More importantly, an investor with a portfolio of stocks, bonds and hedge funds under both the unconditional strategy and conditional strategy is hurt by the presence of a hedge fund lockup period. In an unconditional setting, we find a Sharpe ratio of 1.11 for the portfolio of stocks, bonds and hedge funds adjusted for stale pricing, with a three-month lockup period for hedge funds and monthly rebalancing of stocks and bonds. For the same portfolio, but without a hedge fund lockup period, we find a significantly higher Sharpe ratio of 1.43. The certainty equivalent is 4.11%, i.e. a three-month lockup costs the investor 4.11% per annum.

Number of Pages in PDF File: 36

Keywords: Hedge funds, lockup period, multi-period asset allocation, timing portfolios

JEL Classification: G11, G12

working papers series


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Date posted: March 22, 2009 ; Last revised: November 13, 2009

Suggested Citation

de Roon, Frans and Guo, Jinqiang and ter Horst, Jenke, Being Locked Up Hurts (November 12, 2009). Available at SSRN: http://ssrn.com/abstract=1362000 or http://dx.doi.org/10.2139/ssrn.1362000

Contact Information

Frans A. De Roon
Tilburg University - Department of Finance ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)
Jinqiang Guo (Contact Author)
Tilburg University, Department of Finance ( email )
P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands
Jenke R. Ter Horst
Tilburg University - Center for Economic Research (CentER) ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
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