The Journal of Finance

The Cost of Capital for Alternative Investments

Published: 03/18/2015   |   DOI: 10.1111/jofi.12269

JAKUB W. JUREK, 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.

The Price of Immediacy

Published: 05/09/2008   |   DOI: 10.1111/j.1540-6261.2008.01357.x

GEORGE C. CHACKO, JAKUB W. JUREK, ERIK STAFFORD

This paper models transaction costs as the rents that a monopolistic market maker extracts from impatient investors who trade via limit orders. We show that limit orders are American options. The limit prices inducing immediate execution of the order are functionally equivalent to bid and ask prices and can be solved for various transaction sizes to characterize the market maker's entire supply curve. We find considerable empirical support for the model's predictions in the cross‐section of NYSE firms. The model produces unbiased, out‐of‐sample forecasts of abnormal returns for firms added to the S&P 500 index.