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Wolf in Sheep's Clothing: The Active Investment Strategies behind Index Performance

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  • Angelo Ranaldo
  • Rainer Häberle

Abstract

"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." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Suggested Citation

  • Angelo Ranaldo & Rainer Häberle, 2008. "Wolf in Sheep's Clothing: The Active Investment Strategies behind Index Performance," European Financial Management, European Financial Management Association, vol. 14(1), pages 55-81.
  • Handle: RePEc:bla:eufman:v:14:y:2008:i:1:p:55-81
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-036X.2007.00363.x
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    Cited by:

    1. Richard W. Kopcke & Matthew S. Rutledge, 2004. "Stock prices and the equity premium during the recent bull and bear markets," New England Economic Review, Federal Reserve Bank of Boston, pages 63-85.

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