Secrets of enhanced indexing, securities lending

It is a plain fact that much of what is marketed as outperformance in funds using securities lending, as well as in certain types of enhanced index funds and many bond funds, is simply the product of leverage. The chief problem with this leverage is not its existence, but rather its disguise. That is, the use of leverage is often being ignored, hidden, or used to mislead investors about the investment manager's ability to add value. To the extent that leverage is confused for true alpha, or the value added by manager skill, the plan sponsor will invariably be overcharged for an activity more akin to index management than superior security selection. Plan sponsors and their committees need to be cognizant of the disguised leverage in their portfolios.