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The Cost of Capital for Alternative Investments
Author(s) -
JUREK JAKUB W.,
STAFFORD ERIK
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12269
Subject(s) - hedge fund , downside risk , economics , risk–return spectrum , alternative investment , attractiveness , financial economics , hedge , capital asset pricing model , alternative beta , excess return , capital (architecture) , returns based style analysis , econometrics , rate of return , monetary economics , fund of funds , finance , open end fund , institutional investor , market liquidity , fund administration , context (archaeology) , psychoanalysis , history , portfolio , ecology , biology , psychology , paleontology , archaeology , corporate governance
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.