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

Angelo Ranaldo

University of St. Gallen; University of St. Gallen - SoF: School of Finance

Rainer Haeberle

UBS Investment Bank

April 2005


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 over upward (downward) markets. The constitution and maintenance rules of exclusive indices correspond to a set of active trading and investment rules similar to momentum and stop-loss strategies.

Number of Pages in PDF File: 26

Keywords: index performance, active / passive investment management, momentum strategies, index constituents; selection and rebalancing rules; performance measurement; "buy-and-hold" strategy

JEL Classification: G11

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Date posted: May 7, 2004  

Suggested Citation

Ranaldo, Angelo and Haeberle, Rainer, Wolf in Sheep's Clothing: The Active Investment Strategies Behind Index Performance (April 2005). EFMA 2004 BASEL MEETINGS. Available at SSRN: http://ssrn.com/abstract=552704 or http://dx.doi.org/10.2139/ssrn.552704

Contact Information

Angelo Ranaldo (Contact Author)
University of St. Gallen ( email )
Swiss Institute of Banking and Finance s/bf-HSG
Rosenbergstrasse 52
St. Gallen, 9000
+41712247010 (Phone)
HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx
University of St. Gallen - SoF: School of Finance ( email )
Rosenbergstrasse 52
St.Gallen, CH-9000

Rainer Haeberle
UBS Investment Bank ( email )
Europastrasse 1
CH-8152 Opfikon
++41-1-2397255 (Phone)
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References:  22
Citations:  6

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