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Wiley InterScience | |||||||||||
  European Financial ManagementVolume 14 Issue 1, Pages 55 - 81 Published Online: 10 Apr 2007 © 2010 Blackwell Publishing Ltd Published in conjunction with the European Financial Management Association
Abstract | References | Full Text: HTML, PDF (Size: 214K) | Related Articles | Citation Tracking  Wolf in Sheep's Clothing: The Active Investment Strategies behind Index Performance This paper has benefited from comments and suggestions of some of our previous colleagues at UBS AG bank, amongst others David Jessop, Dirk Renkert, Brian Singer, Michael Strobaek, Kevin Terhaar and an anonymous referee to whom we would like to express our gratitude. All errors remain, of course, our own. The views expressed herein are those of the authors and not necessarily those of the Swiss National Bank which takes no responsibility for the content and the opinions expressed in this paper. Copyright 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd KEYWORDS
index performance, active/passive investment management, momentum strategies, index constituents
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selection and rebalancing rules
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performance measurement
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'buy-and-hold' strategy
KEYWORDS
G11 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 in upward (downward) markets. The constitution and maintenance rules of exclusive indices correspond to a set of active trading and investment rules similar to momentum strategies. | 
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