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The Cost of Capital for Alternative Investments

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  • Jakub W. Jurek

    ()
    (Bendheim Center for Finance, Princeton University)

  • Erik Stafford

    ()
    (Harvard Business School, Finance Unit)

Abstract

This paper studies the cost of capital for alternative investments. We document that the risk profile of the aggregate hedge fund universe can be accurately matched by a simple index put option writing strategy that offers monthly liquidity and complete transparency over its state-contingent payoffs. The contractual nature of the put options in the benchmark portfolio allows us to evaluate appropriate required rates of return as a function of investor risk preferences and the underlying distribution of market returns. This simple framework produces a number of distinct predictions about the cost of capital for alternatives relative to traditional mean-variance analysis.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 12-013.

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Length: 41 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:hbs:wpaper:12-013

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