Forced to Be Active: Evidence From a Regulation Intervention
58 Pages Posted: 17 Jul 2020 Last revised: 27 Sep 2023
Date Written: November 23, 2020
Closet indexers are low-activity mutual funds, marketed and sold as active. Therefore, their investors receive only part of the service they pay for. Supervisory authorities around the world are considering how these funds should be regulated. We examine evidence from interventions carried out by Scandinavian regulators. Scrutinized Scandinavian funds, compared with similar unaffected European ones, choose increased activity over fee reduction. This leads to more active management, but also to a significant decrease in alpha of approximately 2%. Thus, regulation leads to the most unfavorable outcome for investors.
Keywords: Asset management; Active portfolio management; Regulation of financial services
JEL Classification: D14, G11, K12
Suggested Citation: Suggested Citation