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Statistical Arbitrage & Fund Performance: An Empirical Analysis of Fund Returns

Berg, Magnus LU and Knutsson, Christoffer LU (2017) NEKP01 20171
Department of Economics
Abstract
Fund companies and banks argue that letting them manage one’s money is a wise decision. They argue that they are able to create substantial growth in value for the investor without requiring any other input than a small fee and an amount to be invested. This essay tests this claim in a two folded analysis.
Time series data with historical value developments of 24 out of the 30 largest Swedish equity funds, along with the value development of the MSCI Sweden SEK stock market index, is used in the analysis. The first part of the analysis uses descriptive statistics of fund net returns and the benchmark index returns to assess whether or not fund managers are able to exploit statistical arbitrage opportunities in the Swedish equity market.... (More)
Fund companies and banks argue that letting them manage one’s money is a wise decision. They argue that they are able to create substantial growth in value for the investor without requiring any other input than a small fee and an amount to be invested. This essay tests this claim in a two folded analysis.
Time series data with historical value developments of 24 out of the 30 largest Swedish equity funds, along with the value development of the MSCI Sweden SEK stock market index, is used in the analysis. The first part of the analysis uses descriptive statistics of fund net returns and the benchmark index returns to assess whether or not fund managers are able to exploit statistical arbitrage opportunities in the Swedish equity market. It is concluded that fund managers are able to do this and consequently create average excess net returns that are greater than zero at an 80% confidence level.
The second part of the analysis investigates if it is really worth the cost of fees to let an actively managed fund take care of one’s investment. The fact that fund managers are able to create positive excess returns is not good enough a reason to motivate fund investment on its own. It is investigated if the best three funds in the data set are able to outperform an active, but free, investment strategy that does not require financial sophistication. The investment strategy is based on a GARCH(2,1) model which is used to forecast the returns of the benchmark index and guide investment decisions. The second part of the analysis concludes that the funds are outperforming the proposed investment strategy on average, indicating that there is merit to the fund companies’ claim; it is worth the cost of fees to have one’s money looked after by an actively managed fund, given that the choice of fund is a well-informed decision. (Less)
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author
Berg, Magnus LU and Knutsson, Christoffer LU
supervisor
organization
course
NEKP01 20171
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Statistical Arbitrage, Fund Performance, Net Returns
language
English
id
8912442
date added to LUP
2017-07-10 14:35:06
date last changed
2017-07-10 14:35:06
@misc{8912442,
  abstract     = {Fund companies and banks argue that letting them manage one’s money is a wise decision. They argue that they are able to create substantial growth in value for the investor without requiring any other input than a small fee and an amount to be invested. This essay tests this claim in a two folded analysis. 
Time series data with historical value developments of 24 out of the 30 largest Swedish equity funds, along with the value development of the MSCI Sweden SEK stock market index, is used in the analysis. The first part of the analysis uses descriptive statistics of fund net returns and the benchmark index returns to assess whether or not fund managers are able to exploit statistical arbitrage opportunities in the Swedish equity market. It is concluded that fund managers are able to do this and consequently create average excess net returns that are greater than zero at an 80% confidence level. 
The second part of the analysis investigates if it is really worth the cost of fees to let an actively managed fund take care of one’s investment. The fact that fund managers are able to create positive excess returns is not good enough a reason to motivate fund investment on its own. It is investigated if the best three funds in the data set are able to outperform an active, but free, investment strategy that does not require financial sophistication. The investment strategy is based on a GARCH(2,1) model which is used to forecast the returns of the benchmark index and guide investment decisions. The second part of the analysis concludes that the funds are outperforming the proposed investment strategy on average, indicating that there is merit to the fund companies’ claim; it is worth the cost of fees to have one’s money looked after by an actively managed fund, given that the choice of fund is a well-informed decision.},
  author       = {Berg, Magnus and Knutsson, Christoffer},
  keyword      = {Statistical Arbitrage,Fund Performance,Net Returns},
  language     = {eng},
  note         = {Student Paper},
  title        = {Statistical Arbitrage & Fund Performance: An Empirical Analysis of Fund Returns},
  year         = {2017},
}