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The more money that moves in to passive funds, the less efficient the market becomes and the more opportunities for profit through active investment.
by willholloway 11y ago
The more money that moves in to passive funds, the less efficient the market becomes and the more opportunities for profit through active investment.
- nether 11y agoUntil they reach an equilibrium where active and passive management yield the same risk-adjusted returns.
- AndyMcConachie 11y agoProve it. Where there is a buck to be made, someone will make it. All this talk of index funds ruining capitalism just sounds like a bunch of whiny fund managers not getting their cut.
- optimusclimb 11y agoI don't know about proving that the market will be "less efficient", as OP put it, but certainly the rules would be quite different. If 100% of retail investors were in "passively" managed funds, wouldn't that just be saying there's a giant fund of money available, to be split among public companies that meet certain criteria - and thus a set of concrete rules to be gamed? It would just be another input into the market equation. Investors could then say, "I think the macro environment right now is going to lead to events X and Y happening, which will in turn ruin these 5 companies, which will cause a rebalance in the giant pool of passively managed fund money, and so I'm going to make this bet that that happens."
- elihu 11y agoMaybe the active funds will reduce their fees to stay competitive.
- willholloway 11y agoThe profits will mostly go to algo shops I imagine.
- rockinghigh 11y agoThis is actually the opposite because ETFs and index funds increase stock correlation and the more correlation among stocks the less hedge you can find. If all stocks moved exactly with the S&P500, you would not make any money.
- fauigerzigerk 11y agoYou forget dividends. If the correlation among stocks is too close to 1, it means that stock prices do not adequately reflect earnings and dividends. So the incentive not to buy index funds would grow and that would make correlations stop growing. Also, the S&P 500 is a market cap based index, which means that passive investors have to ape active investors. So even a small minority of active investors would dominate price formation. Ultimately, I think, the impact of ETFs on correlations will be limited.
- rockinghigh 11y agoDividends are included in the returns when computing correlations. Hedge funds make bets on stocks over performing or under performing compared to a benchmark. If all stocks perform the same, there is no hedge because the weight of a stock in the portfolio does not impact portfolio return.