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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.

Suggested Citation

  • Jakub W. Jurek & Erik Stafford, 2011. "The Cost of Capital for Alternative Investments," Harvard Business School Working Papers 12-013, Harvard Business School.
  • Handle: RePEc:hbs:wpaper:12-013
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    References listed on IDEAS

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    Cited by:

    1. Bradley Jones, 2015. "Asset Bubbles; Re-thinking Policy for the Age of Asset Management," IMF Working Papers 15/27, International Monetary Fund.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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