What is “Window Dressing?”
What is “window dressing”?
“Window dressing” are essentially period end (quarter, semester, end of year) buying activities by institutional fund managers.
Why is it done?
Institutional fund managers usually do ‘window dressing’ at period end (more importantly at year end) especially when the performance of the period is listless at best. Here, they push their holdings higher to make it appear that they have performed better for the period. You will also notice that such activities are done a few minutes before the close of the trading day (more specifically at the auction period of 3:15 pm to 3:19:59).
Why end of day?
Because to get the performance return of the period, for example performance of ALI for 2019, you need its closing price of 2018 and its closing price of 2019. What is essentially needed to be done is to bump up the closing price at the end of the period to make it appear, as said, that the fund performed “better” on paper, on periodical reports, and on marketing materials. Essentially even if a fund is supposedly mandated to find the best return for their clients (fiduciary duty), they also do such things, buying stocks higher, even if they know that the stock is most likely going to correct sharply right after, because fund management is also a “business.” The business side of it is that they need to print “better” performance which they can use for marketing.
Marketing you say?
If you are an investor and are looking to invest in an equity fund, one of your main criteria is historical performance. You would most likely invest in a fund that has performed better that its peers and benchmark. Window dressing activities are done for this purpose. For the funds to report a “better” performance, albeit temporary, so they can attract more investors.
Knowing this, then the prudent strategy is to sell when the funds are buying up their holdings. Specifically, to sell down (few fluctuations lower that the last traded price) at the auction period of 3:15 pm to 3:19 pm (no execution of trades are done here) for you to be first on line to sell while the hit the stock up.
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