2011
Working Paper
HBS Working Paper Series

The Cost of Capital for Alternative Investments

By: Jakub W. Jurek and Erik Stafford

Format:Print
| Language:English
| Pages:41

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

Citation

Jurek, Jakub W., and Erik Stafford. "The Cost of Capital for Alternative Investments." Harvard Business School Working Paper, No. 12-013, September 2011. (NBER Working Paper Series, No. 19643, November 2013.)