A case study of exchange traded investment funds and how to measure their performance: Are listed investment funds a unique portfolio solution for private investors?

Morten Brander Eriksen

Student thesis: Master thesis


Exchange traded investment funds’ only asset is a portfolio of different securities, which investors can invest in by buying the listed shares issued by the fund. This thesis investigates the exchange traded investment funds on the OMX Copenhagen Stock Exchange (CSXE), their characteristics and performance. The thesis investigates if there is evidence for a unique portfolio solution and if the investment funds’ performance provides evidence for a unique product. The basic construction, where the investment funds provide a portfolio of different securities investors can invest in by buying the listed shares issued by the fund, is similar to the mutual fund construction. The investment fund characteristics that once held unique opportunities for the private investors have been diluted by a new tax regulation and the introduction of mutual hedge funds with the same investment opportunities as the investment funds. I investigate different performance measures in order to find measures that fit the investment funds’ return characteristics. Both performance ratios related to the Capital Asset Pricing Model (CAPM) and alternatives ratios are investigated. I find that it is important to consider as many measures as possible when measuring performance, as the measures tell different stories according to how they interpret the risk-return relationship. The measures provide different rankings for the funds, so relying on one measure alone would give insufficient information. The assumptions for CAPM are not fulfilled and I find that the upside measures, Omega and UPR, provided the most unique ranking of the funds. They both match the investment funds’ characteristics and are easily applied despite the bear market situation in the data sample used (31-10-2006 till 31-07-2009) in this thesis. The Small Cap Denmark fund (SCD) and Formuepleje Optimum fund were in most cases the preferred funds, but only SCD has upside potential. This is however mainly due to another investment universe, as SCD did not have favourable upside potential in relation to the general Danish small cap market. This leads to the conclusion that the selected data did not provide evidence for a unique performance or indications that investment funds are a unique product. Investment funds are, even though there is no evidence for a unique product, a possible alternative to mutual funds and mutual hedge funds.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2010
Number of pages98