|
Working Paper
| HBS Working Paper Series
| 2011
The Cost of Capital for Alternative Investments
by
Jakub W. Jurek and Erik Stafford
|
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.
Keywords: Cost of Capital;
Financial Liquidity;
Investment;
Investment Return;
Mathematical Methods;
Risk and Uncertainty;