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> By having most of the capital in passive funds, active management gets easier, and so more valuable, so you want to pay for it. I'm not sure I follow. How do

> By having most of the capital in passive funds, active management gets easier, and so more valuable, so you want to pay for it. I'm not sure I follow. How does this make active management easier and more importantly how does that make it a better investment?

aianus 11y ago
You can front-run the algotraders because you know what they're going to do. A simple example from Bloomberg View: "Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed." The bigger the index funds get, the more easy money there is to be made this way.
- tedmiston 11y ago
  > "Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed." So, just to be explicit, is the suggestion to short AA right before this happens, then re-buy once the algotraders settle?
  - aianus 11y ago
    No, the suggestion is to buy AA before all the index funds tracking the S&P 500 are obligated to buy it at the same time after it's officially added to the index.
evanpw 11y ago
Active trading is what makes prices efficient (passive funds just take the current price as a given, hence the name). The less money that's traded actively, the less efficient prices will be, so the more profitable it will be to trade actively.
SnakePlissken 11y ago
I believe the argument is along the following lines: The more money that is placed into passive indexes (funds that merely attempt to track the performance of something like the S&P500 by owning a proportional, market cap weighted amount of each stock in the index), the less that is being actively managed by a human being or algorithm with the affect of price discovery. With less 'players' in the game acting on their competing investment theses, inefficiencies are expected to widen. In other words, if AAPL is at price X on any given day, that price is the sum total of all buy and sell orders being placed. One can assume that even with a large portion of passive buying today, most involved in trading AAPL are trading on their own assessment of the true value of Apple's stock. If at some future point the majority of money in the market is simply passive/buy-and-hold, the price of AAPL (or any stock/wider index) will be less "efficient" because of the distortion in supply & demand created by an increase of mindless buy orders. Some market watchers have attributed the abnormally placid bull tear of 09-present, at least in part, to this consistent buying. Josh Brown called it the relentless bid [0] and explained how the increased popularity of dollar cost averaging, scheduled index fund purchases, etc could be a major factor. [0] http://thereformedbroker.com/2014/03/05/the-relentless-bid-explained/ http://thereformedbroker.com/2014/03/05/the-relentless-bid-e...

aianus 11y ago

You can front-run the algotraders because you know what they're going to do. A simple example from Bloomberg View: "Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed." The bigger the index funds get, the more easy money there is to be made this way.

tedmiston 11y ago
> "Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed." So, just to be explicit, is the suggestion to short AA right before this happens, then re-buy once the algotraders settle?
- aianus 11y ago
  No, the suggestion is to buy AA before all the index funds tracking the S&P 500 are obligated to buy it at the same time after it's officially added to the index.

evanpw 11y ago

Active trading is what makes prices efficient (passive funds just take the current price as a given, hence the name). The less money that's traded actively, the less efficient prices will be, so the more profitable it will be to trade actively.

SnakePlissken 11y ago

I believe the argument is along the following lines: The more money that is placed into passive indexes (funds that merely attempt to track the performance of something like the S&P500 by owning a proportional, market cap weighted amount of each stock in the index), the less that is being actively managed by a human being or algorithm with the affect of price discovery. With less 'players' in the game acting on their competing investment theses, inefficiencies are expected to widen. In other words, if AAPL is at price X on any given day, that price is the sum total of all buy and sell orders being placed. One can assume that even with a large portion of passive buying today, most involved in trading AAPL are trading on their own assessment of the true value of Apple's stock. If at some future point the majority of money in the market is simply passive/buy-and-hold, the price of AAPL (or any stock/wider index) will be less "efficient" because of the distortion in supply & demand created by an increase of mindless buy orders. Some market watchers have attributed the abnormally placid bull tear of 09-present, at least in part, to this consistent buying. Josh Brown called it the relentless bid [0] and explained how the increased popularity of dollar cost averaging, scheduled index fund purchases, etc could be a major factor. [0] http://thereformedbroker.com/2014/03/05/the-relentless-bid-explained/ http://thereformedbroker.com/2014/03/05/the-relentless-bid-e...