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Wolf in Sheep's Clothing: The Active Investment Strategies behind Index Performance
Author(s) -
Ranaldo Angelo,
Häberle Rainer
Publication year - 2008
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2007.00363.x
Subject(s) - investment (military) , investment strategy , index (typography) , tracking (education) , set (abstract data type) , investment style , selection (genetic algorithm) , economics , clothing , microeconomics , business , econometrics , production (economics) , computer science , return on investment , open ended investment company , artificial intelligence , profit (economics) , psychology , pedagogy , programming language , politics , political science , world wide web , law , archaeology , history
This paper argues that the commonly used market indices imply forms of active investment management in disguise. The selection and rebalancing rules make these indices highly exclusive and dynamic regarding their underlying components and significantly bias their performance. Any passive investment tracking these indices turns into an active strategy characterised by market timing and state‐dependent performance. Evidence is provided that exclusive indices outperform (underperform) more inclusive peer indices in upward (downward) markets. The constitution and maintenance rules of exclusive indices correspond to a set of active trading and investment rules similar to momentum strategies.