Investible benchmarks & hedge fund liquidity

Marc S Freed and Ben McMillan

MPRA Paper from University Library of Munich, Germany

Abstract: A lack of commonly accepted benchmarks for hedge fund performance has permitted hedge fund managers to attribute to skill returns that may actually accrue from market risk factors and illiquidity. Recent innovations in hedge fund replication permits us to estimate the extent of this misattribution. Using an option-based model, we find evidence that the value of liquidity options that investors implicitly grant managers when they invest may account for part or even all hedge fund returns. Coupled with the competition from hedge fund replication vehicles, this finding may motivate hedge fund investors to demand less restrictive investment terms in the future.

Keywords: hedge funds; replication; alpha; exotic beta; hedge fund beta; liquidity; illiquidity; marketability; accessibility; redemption terms (search for similar items in EconPapers)
JEL-codes: G1 G2 (search for similar items in EconPapers)
Date: 2011-07-13
New Economics Papers: this item is included in nep-ban
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:32226

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