More from the Author

• Working Paper | HBS Working Paper Series | 2019

  Do Banks Have an Edge?

  Juliane Begenau and Erik Stafford

  Overall, no! We show that the level and time series variation in cash flows for most bank activities are well matched by capital market portfolios with similar interest rate and credit risk to what banks report to hold. Ignoring operating expenses, bank loans earn high returns and transaction deposits pay low interest rates, consistent with these activities having a potential edge. The edge among these activities is insufficient to cover the large operating expenses of banks. A large portion of the aggregate U.S. banking sector closely resembles a tax inefficient passive mutual fund. The residual risks of bank activities, presumably generated by the unique components of the bank business model, generate systematic risks that are uncompensated.

  Keywords: banks; market efficiency; bank capital; bank debt; CAPM; banking; bank deposits; bank funding advantage; leverage; maturity transformation; replicating portfolio; efficiency; Banks and Banking; Capital Markets; Performance Evaluation; Performance Efficiency; Banking Industry; United States;

  Citation:

  Begenau, Juliane, and Erik Stafford. "Do Banks Have an Edge?" Harvard Business School Working Paper, No. 18-060, January 2018. (Revised October 2019.)  View Details

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• Working Paper | HBS Working Paper Series | 2015

  Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting

  Erik Stafford

  Private equity funds tend to select relatively small firms with low EBITDA multiples. Publicly traded equities with these characteristics have high risk-adjusted returns after controlling for common factors typically associated with value stocks. Hold-to-maturity accounting of portfolio net asset value eliminates the majority of measured risk. A passive portfolio of small, low EBITDA multiple stocks with modest amounts of leverage and hold-to-maturity accounting of net asset value produces an unconditional return distribution that is highly consistent with that of the pre-fee aggregate private equity index. The passive replicating strategy represents an economically large improvement in risk- and liquidity-adjusted returns over direct allocations to private equity funds, which charge average fees of 6% per year.

  Keywords: private equity; value investing; endowments; investment management; Asset Pricing; United States;

  Citation:

  Stafford, Erik. "Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting." Harvard Business School Working Paper, No. 16-081, January 2016.  View Details

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• Article | Journal of Finance

  The Cost of Capital for Alternative Investments

  Jakub W. Jurek and Erik Stafford

  Traditional risk factor models indicate that hedge funds capture pre-fee alphas of 6% to 10% per annum over the period from 1996 to 2012. At the same time, the hedge fund return series is not reliably distinguishable from the returns of mechanical S&P 500 put-writing strategies. We show that the high excess returns to hedge funds and put-writing are consistent with an equilibrium in which a small subset of investors specialize in bearing downside market risks. Required rates of return in such an equilibrium can dramatically exceed those suggested by traditional models, affecting inference about the attractiveness of these investments.

  Keywords: hedge funds; required returns; downside risk; index options; Investment Funds; Cost of Capital; Investment Return; Risk and Uncertainty; Financial Services Industry;

  Citation:

  Jurek, Jakub W., and Erik Stafford. "The Cost of Capital for Alternative Investments." Journal of Finance 70, no. 5 (October 2015): 2185–2226.  View Details

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