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The Revealed Preference of Sophisticated Investors
Author(s) -
Blocher Jesse,
Molyboga Marat
Publication year - 2017
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12128
Subject(s) - capital asset pricing model , hedge fund , preference , financial economics , alternative beta , asset (computer security) , economics , mutual fund , business , open end fund , institutional investor , finance , microeconomics , computer science , corporate governance , computer security
Abstract Berk and van Binsbergen (2016) have shown that the Capital Asset Pricing Model (CAPM) best represents the revealed preferences of any investor who can invest in mutual funds (i.e., all investors). This claim seems overly broad, as it applies to all asset classes. However, we show that hedge fund investors' revealed preferences are also best modeled by the CAPM. Because hedge fund investors are sophisticated and can access all assets classes, our finding supports this broad claim. Using the CAPM is rational, as we show that CAPM alpha correlates with managerial skill and predicts performance better than other multi‐factor models.