Window dressing is a strategy. It’s a strategy used by the fund and other portfolio managers near the year or quarter end to improve the appearance of a fund’s performance before being presented to clients or shareholders. For window dress, the fund manager sells shares with large losses and buys high-floating shares near the end of the quarter. These securities are then reported as part of the fund’s holdings. Performance reports and a list of holdings in an investment fund are usually sent to customers every quarter, and customers use these reports to monitor the fund’s return on investment.
Once the performance is down, investment managers can use window disguise to sell stocks that have reported significant losses. And replace them with stocks that are expected to produce short-term gains to improve the overall performance of the fund over the reporting period. Another variant of window dressing cases is to invest in shares that do not meet the fund’s style. For example, a precious metal fund may invest in shares in a hot sector at that time, hide the fund’s holdings and invest outside the fund’s investment strategy.
For investors, window dressing provides another good reason to closely monitor your performance reports. Some fund managers may try to improve returns through window disguise. Which means investors need to be cautious about stocks that seem to be out of line with the fund’s overall strategy. Window dressing practices is closely monitored by investment scientists and regulators with potential future rules that might require more immediate and greater transparency of stocks at the end of a reporting period.