The Revealed Preference of Sophisticated Investors

European Financial Management, Forthcoming

46 Pages Posted: 29 Sep 2016 Last revised: 12 Mar 2017

Jesse Blocher

Vanderbilt University - Finance

Marat Molyboga

Efficient Capital Management, LLC

Date Written: February 20, 2017

Abstract

Recent work by Berk and van Binsbergen (2016) has shown that the Capital Asset Pricing Model (CAPM) best models the revealed preferences of any investor who could invest in mutual funds – that is, all investors. This claim seems overly broad since it applies to all asset classes. However, we show that hedge funds’ revealed preferences are also best modeled by the CAPM. Since hedge fund investors are sophisticated and can access all assets classes, our finding supports this broad claim. This choice is rational since we also show that CAPM alpha is correlated with managerial skill and predicts performance better than other multi-factor models.

Keywords: Benchmarks, Capital Asset Pricing Model, Hedge Funds

JEL Classification: G12, G14, G23

Suggested Citation

Blocher, Jesse and Molyboga, Marat, The Revealed Preference of Sophisticated Investors (February 20, 2017). European Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2844903

Jesse Blocher (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Marat Molyboga

Efficient Capital Management, LLC ( email )

4355 Weaver Parkway
Warrenville, IL 60555
United States
6306576842 (Phone)

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