The Cost of Capital for Alternative Investments

47 Pages Posted: 14 Jan 2013 Last revised: 3 Sep 2015

See all articles by Jakub W. Jurek

Jakub W. Jurek

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

Erik Stafford

Harvard Business School - Finance Unit

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2015


Traditional risk factor models indicate that hedge funds capture pre-fee alphas of 6% to 10% per annum over the period from 1996 to 2012. At the same time, the hedge fund return series is not reliably distinguishable from the returns of mechanical S&P 500 put-writing strategies. We show that the high excess returns to hedge funds and put-writing are consistent with an equilibrium in which a small subset of investors specialize in bearing downside market risks. Required rates of return in such an equilibrium can dramatically exceed those suggested by traditional models, affecting inference about the attractiveness of these investments.

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

JEL Classification: G12, G23, G31

Suggested Citation

Jurek, Jakub W. and Stafford, Erik, The Cost of Capital for Alternative Investments (March 1, 2015). Harvard Business School Working Paper No. 1910719, Available at SSRN: or

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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