Sure-Fire Trade Exploiting Dumb Index Cash Crushed by Crowding

One of the most reliable strategies in the hedge-fund world this century is also one of the simplest: Buy stocks that are entering major indexes and sell those that are exiting them. For Emmanuel Terraz, it has minted profits practically his whole career.

But something is changing, and the Frenchman’s Candriam Index Arbitrage fund — which has gained in all but four of its 19 years, including through the financial crisis and Covid — posted its worst-ever performance in 2022.

The Paris-based investor’s diagnosis: With everyone from Millennium Management to Man Group now pursuing it, the strategy that exploits ...