Are Student-Managed Funds Closet Indexers?

Many business schools offer finance students the opportunity to run student-managed funds, which are meant to give participants experience running real money in real time. The usefulness of such an experience, however, depends on the structure of the fund: is it grounded in economic principles; does it mitigate or exacerbate behavioral investment biases; does it focus on stock picking, or emphasize portfolio management; does it promote true active management, or encourage benchmark-mimicking closet indexing? In this paper, we present a description of our university’s fund, highlighting critical industry measures of active management to assess its performance. Some of our main generalizable findings are that funds’ benchmarks must be consistent with the actual investment approach employed, that performance metrics must be clearly and explicitly determined in advance, and that the fund’s investment policy statement must be reflective of empirical market realities.