Random Thoughts

Over the past 20 years, passive investing has gained a lot of momentum. It was and still is a great investment strategy. Two-thirds of active managers underperformed indices they were tracking while charging substantial fees. A typical mutual fund of the past had a "load" structure, i.e. an investor had to pay a few percentage points just to enter. Tax inefficiencies were embedded by design. Typical behavioral problems associated with over-trading and individual name selection, by contrast, are eliminated in passive vehicles, all while many of them charge only a few basis points. That's practically free. The sheer size of behemoths such as Vanguard and Black Rock is a testament to the success of this business model. By 2023 AUM in passive funds has finally overtaken those in active.

And yet over the past few years, voices from some prominent investors started to emerge pointing to inherited dangers to the market structure caused by the proportions of passive funds relative to the market. 

In a recent podcast, Barry discusses intricate details of passive vs. active funds with Ricky Sandler. After the initial introduction, the conversation quickly dives into a highly technical financial rabbit hole. Here is an incomplete list of the main points the guest was making:

- Passive strategies are good for individual investors, but when these funds collectively exceed 25% of the market, non-linear dangers form.
- What we know as "passive" index investing, isn't passive, due to the implementation details by managers.
- Most of these funds have a "relentless bid" being contributed regularly, e.g. 401K contributions, which will magnify potential fallout.
- Artificially subdued volatility profile for the market as a whole.
- "Closet indexing" strategies are too insignificant in scale to matter as a counterbalance. 
- Marginal price theory was buttressed by some specific examples, where relatively small-sized selling resulted in a significant price change.
- Successful profiting from Volmageddon and structural analogy to the rest of the passively managed universe.

If you are a finance geek I highly recommend this inspirational talk.

#finance
August 2024

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www.tgoop.com/random_from_sherlock/373

288 viewsedited  Aug 24, 2024 at 18:23

Over the past 20 years, passive investing has gained a lot of momentum. It was and still is a great investment strategy. Two-thirds of active managers underperformed indices they were tracking while charging substantial fees. A typical mutual fund of the past had a "load" structure, i.e. an investor had to pay a few percentage points just to enter. Tax inefficiencies were embedded by design. Typical behavioral problems associated with over-trading and individual name selection, by contrast, are eliminated in passive vehicles, all while many of them charge only a few basis points. That's practically free. The sheer size of behemoths such as Vanguard and Black Rock is a testament to the success of this business model. By 2023 AUM in passive funds has finally overtaken those in active.

And yet over the past few years, voices from some prominent investors started to emerge pointing to inherited dangers to the market structure caused by the proportions of passive funds relative to the market. 

In a recent podcast, Barry discusses intricate details of passive vs. active funds with Ricky Sandler. After the initial introduction, the conversation quickly dives into a highly technical financial rabbit hole. Here is an incomplete list of the main points the guest was making:

- Passive strategies are good for individual investors, but when these funds collectively exceed 25% of the market, non-linear dangers form.
- What we know as "passive" index investing, isn't passive, due to the implementation details by managers.
- Most of these funds have a "relentless bid" being contributed regularly, e.g. 401K contributions, which will magnify potential fallout.
- Artificially subdued volatility profile for the market as a whole.
- "Closet indexing" strategies are too insignificant in scale to matter as a counterbalance. 
- Marginal price theory was buttressed by some specific examples, where relatively small-sized selling resulted in a significant price change.
- Successful profiting from Volmageddon and structural analogy to the rest of the passively managed universe.

If you are a finance geek I highly recommend this inspirational talk.

#finance
August 2024

BY Random Thoughts