Measuring skill in the Nordic hedge fund industry : an empirical study of the value Nordic hedge fund managers extract from financial markets

Abstract

In this thesis, we use a unique dataset on Nordic hedge funds from January 2004 to August 2018 to investigate managerial skill in the Nordic hedge fund industry. Managerial skill is measured by the value hedge fund managers extract from financial markets, termed the value added. To estimate the value added, we use a rolling window regression and regress unsmoothed hedge fund returns on the factors from an extension of the Fung-Hsieh 7-factor model. We find that the average Nordic hedge fund manager generates approximately $2 million (0.72% of avg. AUM) per month, while the median manager generates $0.5 million (0.18% of avg. AUM) per month. We document that Nordic hedge fund managers’ performance is persistent and therefore that managerial skill is present in the Nordic hedge fund industry. Nevertheless, we find cross-sectional differences in managerial skill between the top and bottom Nordic hedge fund managers. Further, we find that parts of the variation in the value added can be attributed to general hedge fund characteristics. Hence, the positive value added generated in the Nordic hedge fund industry is not solely a result of managerial skill.