Performance measurement of Danish hedge funds 2007‐2010

Christina Larsen

Student thesis: Master thesis


Many years of growth have evolved the global hedge fund industry into a highly diversified industry. From the early days of the industry it has been known that hedge funds are able to generate positive returns in all market conditions. This is due to their nature as investment vehicles with very broad ranges of investment possibilities. The original purpose of hedge funds was to protect the investor by neutralizing market movements and generate absolute positive returns, but many things have changed since then. Today, the hedge fund industry contains a variety of investment strategies and styles. Thus, hedge fund performance is strictly dependent on the specific hedge fund in question. The purpose of this thesis is to evaluate the performance of the Danish hedge fund industry during the years 2007-2010. The Danish hedge fund industry is rather small and therefore this thesis evaluates each hedge fund individually and the Danish hedge fund industry as an index. The evaluation is an analysis of historical returns which is based on mean returns, risk measures and a basket of risk-adjusted performance measures. The classical performance measures Sharpe Ratio, Treynor Measure and Jensen’s Alpha are accompanied by the two newer measures M2 and Sortino Ratio. The analysis finds that most Danish hedge funds fall within one of two categories. The first category contains hedge funds which provide small to medium sized stable returns with low volatilities. Mostly these funds have Beta values around zero, low market correlations and seem to protect the investor by minimizing market risk. The second category covers hedge funds which have big losses and very high volatility. These funds seem to have high degrees of leverage, high market correlations and high Beta values. An index of the Danish hedge funds reveals poor performance in the Danish hedge fund industry. It seems that the Danish hedge fund industry does not hedge the investor in volatile market conditions. The thesis also includes a small case study of the Danish hedge fund, Mermaid Nordic. The purpose is to determine whether Mermaid Nordic manages to create alpha and whether Mermaid Nordic is a feasible investment when risk and fees are considered. The main finding is that Mermaid Nordic is a good investment: Mermaid Nordic manages to hedge the investor, keep a conservative risk level and maintain stable returns during changing market conditions.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2011
Number of pages93