The Cost of Capital for Alternative Investments

Jakub W. Jurek and Erik Stafford

No 19643, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that the risks and pre-fee returns of broad hedge fund indices can be accurately matched with simple equity index put writing strategies, which provide monthly liquidity and complete transparency over their state-contingent payoff profiles. This nonlinear risk exposure combines with large allocations, typical among investors in alternatives, to produce required rates of return that are more than twice as large as those implied by popular linear factor models. Despite earning annualized excess returns over 6% between 1996 and 2010, many hedge fund investors have not covered their proper cost of capital.

JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2013-11
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as JUREK, J. W. and STAFFORD, E. (2015), The Cost of Capital for Alternative Investments. The Journal of Finance, 70: 2185–2226. doi:10.1111/jofi.12269

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Working Paper: The Cost of Capital for Alternative Investments (2011)
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