Performance comparison of social trading and portfolio management

The objective of this master thesis was to determine whether social traders outperform institutional traders. Due to the relative novelty of social trading as an investment method, there is a lack of research in the literature and especially a lack of comparison of the performance of the different investment methods. From the existing literature on 'Social Trading', it was only possible to find out that investors have different risk aversions. At the beginning, the basic terms were explained, which was necessary for the understanding about the investment method due to the unfamiliarity of the terminology. Investors' risk preference was considered, which led to certain selection criteria of the portfolios used in the empirical part. Moreover, the most common indicators for performance measurement were presented and selected for relevance to the present work. The portfolios to be studied were selected from an identical industry. Three different industries were compared. The portfolios to be compared were selected based on the composition of their positions. Ten portfolios were thus compared to each other and to the benchmark MSCI World. In addition, the performance of three Social Trader portfolios was analyzed against ETFs of the same industry. The observation periods varied depending on the creation date of the social trading portfolios. For analysis, monthly profitability, Sharpe ratio, volatility, risk-return profile, Treynor ratio, a regression analysis to determine alpha (excess return, also known as Jensen's alpha) and betas, and an ANOVA to test the validity of the model were calculated. In four out of five cases, the social traders' portfolios were able to generate higher alpha as well as have better ratios of the sharp ratio and risk-return profile. Social traders were found to perform better than the benchmark. Whether social traders perform better than institutional trades could not be answered unambiguously, as the validity of the models can be questioned in two out of five cases. If all data are considered, institutional traders seem to have a better performance, if the critical models are excluded, social traders seem to have a better performance. However, when compared to ETFs, social traders were found to have significantly better results.