Locked Up by a Lockup: Valuing Liquidity as a Real Option
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Date: 03-02-2009
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Andrew Ang, Business School: Columbia University
Location: 412 Schapiro CEPSR, Davis Auditorium
ABSTRACT
Hedge funds often impose lockups and notice periods to limit the ability of investors to withdraw capital. We model the investor's decision to withdraw capital as a real option and treat lockups and notice periods as exercise restrictions. Our methodology incorporates time-varying probabilities of hedge fund failure and optimal early exercise. We estimate a two-year lockup with a three-month notice period costs investors 1.5% of their initial investment. The magnitude is sensitive to a fund's age, expected return, and the liquidation cost upon failure.The cost of illiquidity can exceed 10% if the hedge fund manager suspends withdrawals.
BIO
Andrew Ang is Professor of Finance and Economics at Columbia Business School and specializes in empirical asset pricing and applications of econometrics to financial problems. He has developed macro-models of fixed income, valuation models with time-varying expected returns, models of downside risk and other non-linearities in asset returns, and asset allocation. Ang graduated in 1999 with a PhD in Finance from Stanford University and joined Columbia in that year. He is a Research Associate of the National Bureau of Research and is the recipient of several grants, including grants from the National Science Foundation and grants from major industry organizations such as the Q-Group, INQUIRE-UK, and INQUIRE-Europe. Author of 25 published articles, he is Associate Editor at half a dozen journals including the Journal of Finance and Journal of Finance and Quantitative Investments. Ang teaches MBA classes on investments and quantitative investing and PhD
classes on empirical asset pricing.