Vol. 17, No. 4, 2019
John Hull, Andrew W. Lo and Roger M. Stein
We deﬁne long shots as investment projects with four features: (1) low probabilities of success; (2) long gestation lags before any cash ﬂows are realized; (3) large required up- front investments; and (4) very large payoffs (relative to initial investment) in the unlikely event of success. Funding long shots is becoming increasingly difﬁcult—even for high- risk investment vehicles like hedge funds and venture funds—despite the fact that some of society’s biggest challenges such as cancer, Alzheimer’s disease, global warming, and fossil-fuel depletion depend critically on the ability to undertake such investments. We investigate the possibility of improving ﬁnancing for long shots by pooling them into a single portfolio that can be ﬁnanced via securitized debt, and examine the conditions under which such funding mechanisms are likely to be effective.