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

26 Pages Posted: 7 May 2004

See all articles by Angelo Ranaldo

Angelo Ranaldo

University of Basel - Faculty of Business and Economics; Swiss Finance Institute; University of St. Gallen

Rainer Haeberle

UBS Investment Bank

Date Written: April 2005

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 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.

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

JEL Classification: G11

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: https://ssrn.com/abstract=552704 or http://dx.doi.org/10.2139/ssrn.552704

Angelo Ranaldo (Contact Author)

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)

HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://fin-sr.unisg.ch

Rainer Haeberle

UBS Investment Bank ( email )

Europastrasse 1
CH-8152 Opfikon
Switzerland
++41-1-2397255 (Phone)

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