Forced to be Active: Evidence from a Regulation Intervention

Mutual funds known as closet indexers are marketed as active but actually operate as low-activity funds. Investors end up paying for full service but receiving only a part of it. Supervisory authorities around the world are considering ways to regulate these funds. In this context, we examine the impact of regulatory interventions by Scandinavian regulators. We compare the scrutinized Scandinavian funds with similar unaffected European funds. The findings suggest that the regulated Scandinavian funds preferred increased activity over fee reduction. Consequently, fund managers adopted more active management strategies, resulting in a significant 2% decrease in annual alpha. Therefore, the regulatory interventions resulted in unfavorable outcomes for investors.

This paper was accepted by Bo Becker, finance.

Funding: This research was supported by funding from the Varekrigsfond for forsikringsaktiviteter at NHH.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03124.