Download this Paper Open PDF in Browser

Being Locked Up Hurts

36 Pages Posted: 22 Mar 2009 Last revised: 13 Nov 2009

Frans de Roon

Tilburg University - Department of Finance

Jinqiang Guo

Tilburg University, Department of Finance

Jenke ter Horst

TIAS School for Business and Society

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

JEL Classification: G11, G12

Suggested Citation

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

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

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Paper statistics

Downloads
125
Rank
91,138
Abstract Views
1,630