Abstract
Closet indexers are low-activity mutual funds sold and marketed as active. Their investors are thus only partially receiving the service they pay for. Therefore, regulation is considered by supervisory authorities worldwide. We examine the impact of policy scrutiny by comparing scrutinized closet index funds in Scandinavia with similar unaffected European funds. We find that funds under scrutiny choose to increase activity over reducing fees and updating their investor information to reflect realized strategy. Despite investors getting a more actively managed fund, our findings suggest that value creation decreases. Regulation thus results in the worst of all worlds.
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