Investing for the Long Run
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Knut N. Kjaer
affiliation not provided to SSRN
November 11, 2011
Long‐horizon investors have an edge. They can ride out short‐term fluctuations in risk premiums, profit from periods of elevated risk aversions and short‐term mispricing, and they can pursue illiquid investment opportunities. The turmoil we have seen in the capital markets over the last decade has increased the competitive advantage of a long investment horizon. Unfortunately, the two biggest mistakes of long‐horizon investors - procyclical investments and misalignments between asset owners and managers - negate the long‐horizon advantage. Long‐horizon investors should harvest many sources of factor risk premiums, be actively contrarian, and align all stakeholders so that long‐horizon strategies can be successfully implemented. Illiquid assets can, but do not necessarily, play a role for long-horizon investors, but investors should demand high premiums to compensate for bearing illiquidity risk and agency issues.
Number of Pages in PDF File: 15
Keywords: contrarian, countercyclical investing, agency problem, delegated portfolio management, illiquid investments
JEL Classification: G11, G12, G23, G34
Date posted: November 12, 2011
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