The Revealed Preference of Sophisticated Investors
European Financial Management, Forthcoming
46 Pages Posted: 29 Sep 2016 Last revised: 10 Jul 2017
Date Written: February 20, 2017
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: Suggested Citation