Corpus ID: 26709895

On the Impact of Closet Indexing in Active Fund Management

@inproceedings{2016OnTI,
  title={On the Impact of Closet Indexing in Active Fund Management},
  author={},
  year={2016}
}
  • Published 2016
We propose a simple model to quantify the performance impact of closet-indexing in equity fund management, with a focus on mutual funds. The model requires only two inputs: the Sharpe ratio of the market index and the Rsquare from a regression of a fund’s excess returns on systematic factor returns. Due to pervasive closet-indexing, R-squares are uniformly close to one, regardless of the asset pricing benchmark. We show that closet-indexing leads to gross alphas that do not survive realistic… Expand
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