Pioneering Portfolio Management by David F. Swensen

Author:David F. Swensen
Language: eng
Format: epub
Publisher: Free Press
Published: 2009-04-14T04:00:00+00:00

Absolute Return and Inflation

Since short duration characterizes absolute return investments, well-structured absolute return portfolios exhibit high sensitivity to the short-term cost of money. In event-driven merger arbitrage and distressed security transactions, investors generally expect resolution within months, with longer term deals extending to no more than a year or two. Since event-driven investors factor the cost of funds into the investment equation, as investors enter new deals the calculations reflect the then-current cost of funds. Similarly, the short rebate earned by the value-driven long/short investor represents a short-term cost of money. Just as money market rates tend to track inflation rates, so does the short-duration, cost-of-funds-sensitive absolute return portfolio.

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