closet indexing

Closet Index Fund

A mutual fund that is actively managed in theory, but more or less tracks a benchmark stock index. Closet index funds generally exist because their managers believe it is safer to generally track indices rather than take on the greater risks incumbent with more active management. Closet index funds do not advertise themselves as such, but one may determine whether a mutual fund is one by comparing its R square to a given index. Some advisors counsel staying away from closet index funds as they carry fees and commissions associated with mutual funds, and one can directly invest in an index for less expense, while achieving the same result.

closet indexing

An investment method in which an individual develops a widely diversified portfolio of securities that achieves a performance level nearly identical to that of a broad-based market average yet claims the performance is the result of active management based on market expertise.
References in periodicals archive ?
Closet indexing was the real bubble that is currently popping.
A system that encourages closet indexing while delivering negative value to investors is clearly broken.
More specifically, asset bloat, benchmark tracking and overdiversifying need to be discouraged, for these are the precursors of closet indexing.
If you own some mutual funds, they may be less diversified than you think, not likely to outperform their benchmark indexes and overcharging you -- thanks to closet indexing.
Here's the problem, though: Unbeknownst to most investors, many managed mutual funds are engaging in closet indexing, with their holdings greatly overlapping with those of their benchmark indexes.
The most active stock pickers tend to create value for investors while factor bets and closet indexing tend to destroy value.
To answer this question, we will look at the total costs of equity funds as well as the implications of another little understood obstacle, closet indexing.
Looking at the evolution of active management over time, Petajisto and Cremers also find that closet indexing is a relatively new problem that is on the rise.
Now, a new study by three finance professors seeks to locate active managers' incentive for closet indexing.
Asked why just 30% of funds rather than a larger proportion of the 80% of funds that are officially actively managed don't resort to closet indexing, Morey thought integrity might have something to do with it.