The Cost of Capital for Alternative Investments
47 Pages Posted: 14 Jan 2013 Last revised: 3 Sep 2015
There are 2 versions of this paper
The Cost of Capital for Alternative Investments
The Cost of Capital for Alternative Investments
Date Written: March 1, 2015
Abstract
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: Suggested Citation
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