Locked Up by a Lockup: Valuing Liquidity as a Real Option
Abstract"Hedge funds often impose lockups and notice periods to limit the ability of investors to withdraw capital. We model the investor's decision to withdraw capital as a real option and treat lockups and notice periods as exercise restrictions. Our methodology incorporates time-varying probabilities of hedge fund failure and optimal early exercise. We estimate a two-year lockup with a three-month notice period costs approximately 1% of the initial investment for an investor with constant relative risk aversion utility and risk aversion of three. The cost of illiquidity can easily exceed 10% if the hedge fund manager can arbitrarily suspend withdrawals." Copyright (c) 2010 Financial Management Association International..
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Bibliographic InfoArticle provided by Financial Management Association International in its journal Financial Management.
Volume (Year): 39 (2010)
Issue (Month): 3 (09)
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Postal: University of South Florida 4202 E. Fowler Ave. COBA #3331, Tampa, FL 33620
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0046-3892
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Other versions of this item:
- Andrew Ang & Nicolas P.B. Bollen, 2010. "Locked Up by a Lockup: Valuing Liquidity as a Real Option," NBER Working Papers 15937, National Bureau of Economic Research, Inc.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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- Ang, Andrew & Gorovyy, Sergiy & van Inwegen, Gregory B., 2011.
"Hedge fund leverage,"
Journal of Financial Economics,
Elsevier, vol. 102(1), pages 102-126, October.
- Hombert, Johan & Thesmar, David, 2014. "Overcoming limits of arbitrage: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 111(1), pages 26-44.
- Schaub, Nic & Schmid, Markus, 2013. "Hedge fund liquidity and performance: Evidence from the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 671-692.
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