Corpus ID: 26709895

On the Impact of Closet Indexing in Active Fund Management

  title={On the Impact of Closet Indexing in Active Fund Management},
  • 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
1 Citations

Tables from this paper

Active Share and Closet Indexing in Emerging Markets
Unfortunately, this paves the way to subtle agency problems where some managers may feign an active style in order to charge higher fees to their clients. Instead, they will deviate scantly from theExpand


Institutional investors and the limits of arbitrage
The returns and stock holdings of institutional investors from 1980 to 2007 provide little evidence of stock-picking skill. Institutions as a whole closely mimic the market portfolio, with pre-costExpand
Luck Versus Skill in the Cross Section of Mutual Fund Returns
The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. BootstrapExpand
The Road Less Traveled: Strategy Distinctiveness and Hedge Fund Performance
We investigate whether skilled hedge fund managers are more likely to pursue unique investment strategies that result in superior performance. We propose a measure of the distinctiveness of a fund'sExpand
Do the Best Hedge Funds Hedge
We provide a simple argument that suggests that better-informed hedge funds choose to have less exposure to factor risk. Consistent with this argument, we find that hedge funds that exhibit lowerExpand
Mutual Fund's R^2 as Predictor of Performance
We propose that fund performance can be predicted by its R-super-2, obtained from a regression of its returns on a multifactor benchmark model. Lower R-super-2 indicates greater selectivity, and itExpand
How to Use Security Analysis to Improve Portfolio Selection
It has been argued convincingly in a series of papers on the Capital Asset Pricing Model that, in the absence of insight generating expectations different from the market consensus, the investorExpand
Shedding Light on “Invisible” Costs: Trading Costs and Mutual Fund Performance
Industry observers have long warned of the “invisible” costs of fund trading, yet evidence that these costs matter is mixed because many studies do not account for the largest trading-costExpand
The Arithmetic of Active Management
(1991). The Arithmetic of Active Management. Financial Analysts Journal: Vol. 47, No. 1, pp. 7-9.
Goyenko, “Mutual fund’s R2 as a predictor of performance,
  • Review of Financial Studies,
  • 2013
The Global Rise of the Value-Weighted Portfolio