Mutual Fund Behavior in Volatile Markets - a Study of the Swedish Premium Pension System

Abstract: The Swedish Premium Pension system is constructed to allow investorsthe freedom to choose between a multitude of active and passive funds.Active funds carry higher fees in return for their activity while delivering meagre returns during the twelve years since the inception of the system. However, the opacity of the system makes it possible for managers to follow a closet indexing strategy while branding their funds as active. This thesis investigates the behaviour of actively managed funds and how their level of activity has been aected by the large shifts in market volatility of recent years. We construct several measures of activity and use both forward- and backward-looking measures of volatility. Our results prove inconclusive with two measures suggesting maintained activity and one indicating closet indexing. However, we argue that investors may want to consider choosing passively managed funds in light of the performance of active funds.