Investible benchmarks & hedge fund liquidity
AbstractA 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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 32226.
Date of creation: 13 Jul 2011
Date of revision:
hedge funds; replication; alpha; exotic beta; hedge fund beta; liquidity; illiquidity; marketability; accessibility; redemption terms;
Find related papers by JEL classification:
- G1 - Financial Economics - - General Financial Markets
- G2 - Financial Economics - - Financial Institutions and Services
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- Longstaff, Francis A, 1995. " How Much Can Marketability Affect Security Values?," Journal of Finance, American Finance Association, vol. 50(5), pages 1767-74, December.
- Stephen Brown & William Goetzmann, 2001.
"Hedge Funds With Style,"
Yale School of Management Working Papers
ysm21, Yale School of Management, revised 01 Apr 2008.
- Fung, William & Hsieh, David A., 2000. "Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 291-307, September.
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