Active fund managers will lose about $12 billion a year in management fees thanks to the rising popularity of index-based products, such as ETFs, according to a new TABB Group report, Performance Anxiety: A Buy-Side Study of Benchmarks and the Investment Process.
Indexing is like the eponymous creature from the movie, The Blob, absorbing everything in its path and leaving nothing but low-priced investment vehicles in its wake, according to the study. If hedge fund replication is even partially successful, billions more in management and performance fees could be transferred from managers back to investors.
Assets under management for index-based funds have increased 2,610% since 1993.
Benchmarking is one of the driving forces behind the shift, the study claims. Benchmarks used to be an afterthought; now they are primary because of increased attention to the funded status of pension plans. Benchmarking itself has become granular and precise, giving rise to ETFs and over-the-counter derivatives that will attempt to capture beta on the cheap, hedge against interest-rate risk and buy alpha.