Closet Index Funds and Retail Investor Protection – A Scandinavian Perspective

Abstract

This paper 1 discusses the need for legal measures to ensure a higher degree of investor protection against closet indexing. ‘Closet indexing’ refers to practices where a fund claims to attempt to beat the market, despite following a passive investment strategy in practice. Such practices may harm investors, who might end up paying higher fees than necessary while not receiving the service they expect. The analyses herein are based on the European legal framework for fund management and examine how this framework is applied in Scandinavian countries. Practices from Scandinavian countries reveal the need for legal measures to improve investor protection against closet indexing practices. In particular, the paper concludes that there is a need for a coordinated approach to identifying closet indexing and to securing a better interplay between the European legal framework for fund management and national rules on contract and tort law.