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Journal of Finance Vol. 70 No. 5 2015

The Cost of Capital for Alternative Investments

Jakub W. Jurek; Erik Stafford1,2

1 Jurek is at Bendheim Center for Finance, Princeton University and NBER. Stafford is at Harvard Business School. We thank Joshua Coval, Ken French, Samuel Hanson, Campbell Harvey (Editor), Jonathan Lewellen, Andrew Lo (discussant), Burton Malkiel, Robert Merton, Gideon Ozik (discussant), André Perol · 2 Jurek is at Bendheim Center for Finance, Princeton University and NBER. Stafford is at Harvard Business School. We thank Joshua Coval, Ken French, Samuel Hanson, Campbell Harvey (Editor), Jonathan Lewellen, Andrew Lo (discussant), Burton Malkiel, Robert Merton, Gideon Ozik (discussant), André Perold

Abstract

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.

DOI
10.1111/jofi.12269
Volume
70
Issue
5
Pages
2185-2226
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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