Stansky's Monster: A Critical Examination of Fidelity Magellan's 'Frankenfund'

Abstract

Fidelity Magellan Fund has become the poster child of closet (or shadow) index funds. While the fund's tendency to mimic the S&P 500 Stock Index first garnered attention in the early 1990s, this propensity turned extreme a decade later under the leadership of Robert Stansky. Employing analytic techniques developed in a recent article by the author, this article demonstrates that if the active component of Magellan were considered as a standalone market-neutral investment, its investors would have lost at least 50% of their money between 2002 and 2004. The bulk of this loss, which is more than four times greater than the worst comparable hedge fund, cannot be accounted for by any combination of Magellan's stated expenses, portfolio turnover, investment style, industry selections, or stock picks. This article posits that computer models employed by Mr. Stansky to pit his fund directly against the S&P 500 were a likely source of the unexplained losses.

Keywords: Mutual funds, portfolio optimization, shadow index funds

JEL Classification: G20, G11