Closet Active Management of Passive Funds

56 Pages Posted: 8 Jul 2021

See all articles by Pat Akey

Pat Akey

University of Toronto - Rotman School of Management

Adriana Robertson

University of Toronto - Faculty of Law

Mikhail Simutin

University of Toronto - Rotman School of Management

Date Written: March 1, 2021

Abstract

Ostensibly passive index funds and ETFs are surprisingly active. A third of these funds exhibit more activeness than the median actively managed fund, as measured by conventional proxies. Using hand-collected prospectus data, we find that "passive" funds offer an increasingly wide assortment of styles and provide more extreme factor exposures than active funds. We also identify a new dimension of activeness: the use of an index that is explicitly proprietary to the index fund or ETF. In contrast with actively managed funds, more active index funds and ETFs---"closet activists"---underperform. A one-standard deviation increase in activeness is associated with a 55 basis-point decrease in annual alpha. Our results point to the increasingly blurred line between "active" and "passive" funds.

Suggested Citation

Akey, Pat and Robertson, Adriana and Simutin, Mikhail, Closet Active Management of Passive Funds (March 1, 2021). Rotman School of Management Working Paper No. 3874582, Available at SSRN: https://ssrn.com/abstract=3874582 or http://dx.doi.org/10.2139/ssrn.3874582

Pat Akey

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Adriana Robertson

University of Toronto - Faculty of Law ( email )

78 Queen's Park
Toronto, Ontario M5S 2C5
Canada

HOME PAGE: http://https://www.law.utoronto.ca/faculty-staff/full-time-faculty/adriana-robertson

Mikhail Simutin (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/simutin

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