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Primary Article

Why Institutions Systematically Underperform Broadly Based Market Indexes

Andrew M. Weiss
The Journal of Investing Spring 1999, 8 (1) 65-74; DOI: https://doi.org/10.3905/joi.1999.319391
Andrew M. Weiss
A professor of economics at Boston University. Between 1976 and 1983 he was a professor at Columbia University and a research economist at Bell Laboratories. He holds a B.A. degree from Williams College and a Ph.D. in economics from Stanford University. He is a fellow of the Econometric Society and the portfolio manager and head of research for The Manhattan Funds group, investing in emerging markets.
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Abstract

The reason institutions underperform the indexes is that they are hiring the wrong manager and using the wrong incentives to motivate those managers. The interview/presentation process selects money managers with interpersonal skills that would help them succeed in most managerial positions, but that are either irrelevant or harmful for managing money. We provide a short questionnaire that can be used to select money managers. This questionnaire is intended to replace the interview process for selecting managers, but not to replace on-site investigation of back office operations. The monitoring process is also dysfunctional. By asking managers to justify unfamiliar investment, managers are discouraged from investing in obscure securities even if those investments would increase the risk adjusted returns portfolio. Instead, herding is encouraged where all managers are choosing similar stocks.

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The Journal of Investing
Vol. 8, Issue 1
Spring 1999
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Why Institutions Systematically Underperform Broadly Based Market Indexes
Andrew M. Weiss
The Journal of Investing Feb 1999, 8 (1) 65-74; DOI: 10.3905/joi.1999.319391

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Why Institutions Systematically Underperform Broadly Based Market Indexes
Andrew M. Weiss
The Journal of Investing Feb 1999, 8 (1) 65-74; DOI: 10.3905/joi.1999.319391
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