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Article

Investible Benchmarks and Hedge Fund Liquidity

Marc S. Freed and Ben McMillan
The Journal of Wealth Management Winter 2011, 14 (3) 58-66; DOI: https://doi.org/10.3905/jwm.2011.14.3.058
Marc S. Freed
is a managing director at Lyster Watson & Company in New York, NY.
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  • For correspondence: mfreed@lysterwatson.com
Ben McMillan
is a vice president at Lyster Watson & Company in New York, NY.
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  • For correspondence: bmcmillan@lysterwatson.com
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Abstract

A lack of commonly accepted benchmarks for hedge fund performance has permitted hedge fund managers to attribute to skill those returns that may actually accrue from market risk factors and illiquidity. Recent innovations in hedge fund replication permit us to estimate the extent of this misattribution. Using an option-based model, we find evidence that hedge fund returns in excess of a benchmark may not even compensate investors for liquidity options they grant to managers when they accept restrictions on their right to redeem their investments. Coupled with the competition from hedge fund replication vehicles, this analysis may motivate hedge fund investors to demand relaxed redemption terms from hedge fund managers.

  • Copyright © 2011 Lyster Watson & Company. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Wealth Management: 14 (3)
The Journal of Wealth Management
Vol. 14, Issue 3
Winter 2011
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Investible Benchmarks and Hedge Fund Liquidity
Marc S. Freed, Ben McMillan
The Journal of Wealth Management Oct 2011, 14 (3) 58-66; DOI: 10.3905/jwm.2011.14.3.058

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Investible Benchmarks and Hedge Fund Liquidity
Marc S. Freed, Ben McMillan
The Journal of Wealth Management Oct 2011, 14 (3) 58-66; DOI: 10.3905/jwm.2011.14.3.058
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  • Article
    • Abstract
    • ORIGINS OF PERFORMANCE BENCHMARKS
    • DECOMPOSING HEDGE FUND RETURNS
    • CONSTRUCTING STRATEGY BENCHMARKS WITH RISK FACTORS
    • RISK FACTOR CORRELATION AT THE STRATEGY LEVEL
    • USING REPLICATION BENCHMARKS TO PRICE HEDGE FUND LIQUIDITY
    • ESTIMATED VALUES OF HEDGE FUND ILLIQUIDITY
    • CONCLUSIONS
    • APPENDIX
    • Footnotes
    • REFERENCES
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  • PDF (Subscribers Only)

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