Abstract

http://ssrn.com/abstract=1910719
 
 

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The Cost of Capital for Alternative Investments


Jakub W. Jurek


University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Erik Stafford


Harvard Business School - Finance Unit

May 2013

Harvard Business School Working Paper No. 1910719

Abstract:     
We document that the risks and pre-fee returns of broad hedge fund indices can be accurately matched with simple equity index put writing strategies, which provide monthly liquidity and complete transparency over their state-contingent payoff profiles. This nonlinear risk exposure combines with large allocations, typical among investors in alternatives, to produce required rates of return that are more than twice as large as those implied by popular linear factor models. Despite earning annualized excess returns over 6% between 1996 and 2010, many hedge fund investors have not covered their proper cost of capital.

Number of Pages in PDF File: 49

Keywords: hedge funds, downside risk, replication, performance evaluation, risk management, endowment model

JEL Classification: G12, G23, G31

working papers series


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Date posted: January 14, 2013 ; Last revised: May 26, 2013

Suggested Citation

Jurek, Jakub W. and Stafford, Erik, The Cost of Capital for Alternative Investments (May 2013). Harvard Business School Working Paper No. 1910719. Available at SSRN: http://ssrn.com/abstract=1910719 or http://dx.doi.org/10.2139/ssrn.1910719

Contact Information

Jakub W. Jurek (Contact Author)
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1588 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Erik Stafford
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)
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