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  • Journal of Finance

The Cost of Capital for Alternative Investments

By: Jakub W. Jurek and Erik Stafford
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Abstract

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.
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About The Author

Erik Stafford

Finance
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