Diversifikation i eksternt forvaltede porteføljer

Esben Larsen

Student thesis: Master thesis


The title of this thesis is “Diversification in externally managed portfolios”. More specifically the thesis investigates how many active fund managers, also known as alphamanagers, it is efficient, from a risk-reward perspective, to employ managing one portfolio. This question is sought answered from a forward glancing theoretical perspective, but to grant the thesis validity, the conclusions of the theoretical solution is back-tested through an empirical analysis of historical performance in 222 actively managed funds in the period January 2006 through December 2010, all with benchmark S&P 500. In the thesis we examine different topics that set diversification in the segment actively managed funds apart from traditional diversification, namely the cost-structure and the high correlation of the managed portfolios. We find that the reward from diversification for this segment generally is quite limited in terms of portfolio risk reduction, measured in variance, compared to traditional portfolio theory. The limited benefit stems from the very high correlation between the managers’ returns. Moreover we find that the expected return declines when diversification increases as a result of the cost structure of the segment. When taking into account this decline we find, using Sharpe-Ratio as a measure of risk to reward, the optimal number of managers in a portfolio to be from 1 to 3 for portfolio sizes 25 to 500 million USD. Defining risk as Tracking Error the picture is very much alike. Though we find that the investor can effectively reduce his benchmark-risk significantly through diversification, the costs of doing so rises almost as much. Coupled with the fact that limited risk also means limited upside, this leaves the investor with a return that looks very much like an index tracking fund, but at the much higher cost of active management. If the investor wants the market return, it would be much more cost efficient to simply buy an index fund. Through the empirical analysis we were able to reproduce these conclusions, confirming that these conclusions has at least been present in the segment of active management in the period January 2006 through December 2010.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2011
Number of pages78