Investment Fund Regulation

In my work I addressed internal regulation of investment funds: management and exposure to market risk of actively managed investment funds. For the purpose of assessing the performance of the funds I used Jensen’s alpha formula which is based on CAPM equation and describes the difference between the actual return of the portfolio and return expected given the systematic risk of the portfolio. My input is, first, that I assess all funds together and the results inside different capitalization groups. Second, I assess funds market risk value since they engage in stock trading and are primary exposed to that risk. Lastly, I model a regression in an attempt to explain the variations in Jensen’s alpha given exposure to the market risk and expense ratio of the fund, since it is directly impacted by the fact that fund is under active management. Following empirical analysis, I discovered that there is slight evidence of actively managed mutual funds outperforming the benchmark. My findings show faint evidence that expense ratio is negatively correlated to both risk adjusted performance measures and market risk levels. Hence, passively managed funds, which have drastically lower levels of expense ratio (down to 0,1% in vanguard index tracking funds) would perform even better than actively managed funds with just low expense ratio. However, statistical analysis showed that α values are statistically insignificant from zero and there is no statistical evidence of funds outperforming the benchmark. Regression results showed no statistically significant relationship between VaR, ER and α. Further, OLS estimates of the regression were proven to be biased due to endogeneity. Another problem with the research was the survivorship bias since I used only the data for funds that existed for 9 years.