What is “window dressing”?

“Window dressing” in the US…

At the end of every quarter, TV commentators try to explain stock price action during the last few days of the period by talking about “window dressing.”

The idea is that portfolio managers who have performed poorly during the quarter try to fool their clients by selling some of their weaker stocks and buying the quarter’s winners so their portfolios look better than they actually are.

This is an urban legend.  It doesn’t happen.  Maybe it went on fifty years ago, but not now.  Why not?

1.  It’s a stupid strategy.  A manager who has missed a market move has got to figure out what will come up next and position himself for that, not load up on yesterday’s winners.

2.  It’s counterproductive.  You would be putting downward pressure on your larger positions and upward pressure on your competitors’, making your performance look that much worse.

3.  Your performance numbers are your performance numbers.  How do you intend to explain why you have weak performance numbers in spite of having all the winning stocks?

4.  The deception is easy for clients to detect.  See #3.  Also, institutional clients get detailed transaction information.  If they or their consultants look, they’ll see exactly what the manager is doing.  He’ll be branded as a liar and a cheat–not exactly good for business.

…and outside

“Window dressing” can also be a euphemism for a manager trying to manipulate securities prices in a favorable way on the last trading day of the year, in order to make his performance look better–and his bonus larger.

This is illegal just about anywhere.  The manipulation usually occurs with small- medium-cap stocks, where trading volume may be small.  This is also something the SEC computers can easily detect (a la Martha Stewart), so it doesn’t happen here.  Emerging market regulators may not be so vigilant, or they may have bigger problems to deal with.  In any event, my reading of stock prices says it still happens there.

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