On 12 May 2016, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, the AFM) published a report on index hugging (the Report). Index hugging, also known as closet indexing, refers to funds that are marketed as being actively managed (charging higher management fees), while in reality they require limited management as they only slightly deviate from a benchmark index. According to the AFM, funds qualifying as index huggers do not sufficiently take into account the interests of their clients.

It follows from the Report that 7 out of the 85 funds investigated by the AFM should be regarded as ‘index huggers’. In 2014, these 7 index huggers together managed nearly half a billion euros worth of assets.

The Report contains a number of recommendations aimed at preventing index hugging. These include, but are not limited to:

  • a continuous product approval and product reviews process in order to assess the functioning of the fund;
  • a manager of an active investment fund should adjust the investment policy of the relevant fund. The investment policy should be aimed at offering a fund which is able to beat the benchmark; and
  • a manager of an active investment fund should provide its clients with certain information (e.g. publication of the active share and investment policy).

The Report is in line with a public statement issued by ESMA on 2 February 2016, in which it calls for national regulatory authorities to take measures in order to prevent index hugging.

View the AFM’s news item (Dutch only), 12 May 2016.

View the AFM’s research report (Dutch only), 12 May 2016.

View ESMA’s public statement, 2 February 2016.