In 2006, Baupost's founder and president Seth Klarman gave a talk at Columbia Business School. In his talk, Klarman noted that Baupost has analysts that focus on very specific events: spin-offs, post re-org equities, distressed debt, etc. One set of analysts that I had never heard of a fund employing: analysts that focused on the addition and deletion of stocks in certain indexes like the S&P 500. As one would expect, when a company gets added to the index, passive funds (mutual or ETF) must buy the quantity of stock needed to match the company's weight in the index. Conversely, a stock that is removed from an index will see "forced selling" of their equity as passive strategies sought to match the index components.
"Another problem arises when one or more index stocks must be replaced; this occurs when a member of an index goes bankrupt or is acquired in a takeover. Because indexers want to be fully invested in the securities that comprise the index at all times in order to match the performance of the index, the security that is added to the index as a replacement must immediately be purchased by hundreds or perhaps thousands of portfolio managers. There are implicit assumptions in indexing that securities markets are liquid, and that the actions of indexers do not influence the prices of the securities in which they transact. Yet even very large capitalization stocks have limited liquidity at a given time. Owing to limited liquidity, on the day that a new stock is added to an index, it often jumps appreciably in price as indexers rush to buy. Nothing fundamental has changed; nothing makes that stock worth more today than yesterday. In effect, people are willing to pay more for that stock just because it has become part of an index...A related problem exists when substantial funds are committed to or withdrawn from index funds specializing in small-capitalization stocks. (There are now a number of such funds.) Such stocks usually have only limited liquidity, and even a small amount of buying or selling activity can greatly influence the market price. When small-capitalization-stock indexers receive more funds, their buying will push prices higher; when they experience redemptions, their selling will force prices lower. By unavoidably buying high and selling low, small-stock indexers are almost certain to underperform their indexes. "
- BKU - BankUnited (Russell 1000)
- GM - General Motors (Russell 1000)
- CHMT - Chemtura (Russell 2000)
- CHTR - Charter Communications (Russell 1000)
- FRP - Fairpoint (Russell 2000)
- LYB - Lyondell (Russell 1000)
- SEMG - SemGroup (Russell 2000)
- SIX - Six Flags (Russell 2000)
- VC - Visteon (Russell 1000)