The Cost of Capital for Alternative Investments

50 Pages Posted: 16 Nov 2013

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: November 2013

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.

Suggested Citation

Jurek, Jakub W. and Stafford, Erik, The Cost of Capital for Alternative Investments (November 2013). NBER Working Paper No. w19643, Available at SSRN: https://ssrn.com/abstract=2355649

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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