It seems like quite a few people are claiming the rally on Monday and Tuesday this week is simply just mutual fund (or even pension fund) window dressing. It got me thinking about what it really consists of and whether or not it happens.? Here’s Investopedia’s take on window-dressing:

A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders.

Performance reports and a list of the holdings in a mutual fund are usually sent to clients every quarter. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund’s holdings.

Another variation of window dressing is investing in stocks that don’t meet the style of the mutual fund. For example, a precious metals fund might invest in stocks that are in a hot sector at the time, disguising the fund’s holdings, so clients really have no idea what they are paying for.

So, is it possible? Yes, it is not only possible, but frequently occurs.? Check out Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds.? One interesting point they make is that the window dressing is noticable at quarter-end but not month-end:

Magnitudes range from around 50 basis points per year for large-cap funds to well over 200 basis points for small-cap funds. There is little or no effect at month-ends that are not quarter-ends.

…it is potentially serious because month-ends are common investment dates
in automated investment plans.

Paycheck transfers could in principle contribute to the inflation if they are redirected to recent winners, but this would presumably be symmetric across month-ends […], not concentrated at quarter-ends.

The analysis was done with data up to 2000, so the behavior could have changed since then.

Unfortunately, I don’t think the behavior is consistent enough to trade off-of, but if you’re planning on selling something near a quarter’s end, you may want to consider if it is a stock that would benefit from quarter-end window dressing…