Window dressing represents a form of market manipulation. By engaging in this practice, portfolio managers can try to deceive investors into thinking that their portfolio is performing better than it really is.

Window dressing is commonly used to improve the appearance of a portfolio ahead of investor or shareholder presentations. To do this, portfolio managers may sell off underperforming stocks and buy more attractive ones just before the close of the fiscal quarter. This can make the portfolio look more attractive to buy or hold in the short-term, but the underlying performance of the portfolio doesn’t necessarily reflect the dressing process.

Window dressing can also encompass other short-term strategies such as bolstering certain investments or reallocating holdings. For example, fund managers might temporarily shift their portfolio allocations to those investments that have generated the best returns in the last few months. This may not be the ideal long-term strategy, but it can give the portfolio a short-term boost in performance.

But it is important to note that window dressing is rarely a sustainable strategy and its effects can be short-lived. In some cases, the artificial boost in performance may soon be wiped out with rising volatility in the market. By its very nature, window dressing is highly susceptible to losses and other risks once its effects begin to wear off.

Ultimately, window dressing is a questionable practice that some portfolio managers engage in to give the appearance of better returns. It can temporarily boost a fund’s performance, but these strategies often simply defer losses that will materialize later on. Investors should be skeptical of any fund whose performance appears too good to be true and should always do their due diligence to make sure their portfolios are structured in the best possible way. Anything that looks too good to be true probably is, and window dressing is no exception.