All Talk, No Actions? A Risk-Adjusted Performance Analysis and Sustainability Assessment of Nordic Hedge Funds

Abstract

Hedge funds have to date been rather hesitant towards the incorporation of Environmental, Social and Governance (ESG) factors as the resulting compromised investment universe has been regarded as sacrificing performance. Meanwhile, the Sustainable Finance Disclosure Regulation (SFDR) has been a breakthrough regulation aiming to provide a level playing field for sustainable investment and disclosure thereof. However, vague definitions and guidelines for the classification of financial products classified as Article 8 as in the SFDR have increased concerns for greenwashing. In this thesis we analyse the risk-adjusted performance of five sustainable Nordic hedge funds, classified as SFDR Article 8, compared to a portfolio of seven non-sustainable Nordic hedge funds. In particular, the risk-adjusted performance is analyzed using the following four performance measures: Jensen’s alpha, Treynor ratio, Sharpe ratio, and Sortino ratio. Moreover, the sustainability of the five sustainable hedge funds in terms of their preparedness regarding required sustainability related disclosures as well as their sustainability as reflected in their holdings is analyzed. Overall, the risk-adjusted performance of the five sustainable Nordic hedge funds is superior to the portfolio of non-sustainable Nordic hedge funds regarding all four performance measures. Additionally, the sustainable hedge funds are somewhat prepared in terms of transparent disclosure of sustainability-related information required by the SFDR. Nevertheless, there is varying degree of improvements necessary especially regarding the level of detail of the disclosures. Surprisingly, there are significant differences regarding the type of disclosures and level of detail thereof between the five funds. Moreover, it is questionable whether the holdings of all five funds adequately reflect the level of their promoted sustainability. Again, there are significant differences between the funds. Furthermore, this thesis has come to three thematic areas of contributions and implications for the future, namely: 1. Challenges of regulation: The SFDR needs to be improved such that clear, unified, and consistent definitions and classifications, especially for financial products classified as Article 8, are given. 2. Challenges of application: Financial market participants need to progress on their preparation of and be able to disclose required sustainability-related information in a unified way. 3. Challenges of investing: The holdings of sustainable hedge funds need to improve on reflecting their promoted sustainable investment strategy.