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The Journal of Alternative Investments

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The Value of Liquidity from the Hedge Fund Portfolio Manager’s Perspective

Martin Gagnon, Pierre Laroche and Bruno Rémillard
The Journal of Alternative Investments Spring 2011, 13 (4) 30-39; DOI: https://doi.org/10.3905/jai.2011.13.4.030
Martin Gagnon
is the co-CEO at Innocap Investment Management Inc. in Montreal, QB, Canada.
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  • For correspondence: martin.gagnon@innocap.com
Pierre Laroche
is the managing director of Investment Solutions at Innocap Investment Management Inc. in Montreal, QB, Canada.
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  • For correspondence: pierre.laroche@innocap.com
Bruno Rémillard
is a professor of Management Sciences at HEC in Montreal, QB, Canada.
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  • For correspondence: bruno.remillard@hec.ca
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Abstract

Most recent articles on the value of liquidity try to answer the following question: “What additional return should investors earn to compensate for the liquidity risk they take?” In this article, the authors propose a model that prices liquidity from the portfolio manager’s perspective. The authors focus on the case of hedge fund managers, because the liquidity of hedge funds has been an important issue during the recent financial crisis, as managers have struggled with an important flow of redemption orders. The authors find that under normal market conditions, a liquidity risk premium of at least 50 basis points per year can be justified. More volatile and illiquid conditions justify a much higher premium. The authors’ results are consistent with the idea that liquidity is a sort of put option on the illiquid asset and are also consistent with recent empirical findings.

TOPICS: Real assets/alternative investments/private equity, tail risks, financial crises and financial market history

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The Journal of Alternative Investments: 13 (4)
The Journal of Alternative Investments
Vol. 13, Issue 4
Spring 2011
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The Value of Liquidity from the Hedge Fund Portfolio Manager’s Perspective
Martin Gagnon, Pierre Laroche, Bruno Rémillard
The Journal of Alternative Investments Mar 2011, 13 (4) 30-39; DOI: 10.3905/jai.2011.13.4.030

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The Value of Liquidity from the Hedge Fund Portfolio Manager’s Perspective
Martin Gagnon, Pierre Laroche, Bruno Rémillard
The Journal of Alternative Investments Mar 2011, 13 (4) 30-39; DOI: 10.3905/jai.2011.13.4.030
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