Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • Consultants
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2023
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
Breadcrumb
  1. Home
  2. MONEY MANAGEMENT
August 11, 2017 01:00 AM

Hedge funds get some respect as passive wave grows

Bloomberg
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    The decadelong growth of cheap index funds is giving hedge funds an unexpected influence in setting market prices.

    As investors hand more of their money to passive managers and active stock pickers get sidelined, hedge funds' heft is being magnified. Active fund managers warned Britain's financial regulator that increased index-tracking is distorting markets by allowing hedge funds with "short-term" outlooks to set prices that don't reflect fundamentals.

    The impact on pricing is another consequence of the surge in passive investing, which hedge fund manager Paul Singer said was "in danger of devouring capitalism." Almost $500 billion flowed to passive funds in the first half of 2017, and index followers have grown to account for more than a third of all assets under management in the U.S.

    "As more and more people sign up to passive, will there be enough true price discovery?" asked Patrick Schotanus, an Edinburgh-based multiasset investment strategist at Aegon NV unit Kames Capital, which manages about $59 billion from the U.K. With fewer firms participating, there's "the risk that inefficiencies creep into the market."

    Market inefficiencies have created bouts of extreme volatility in recent years. From the pound's so-called flash crash in October — when the U.K. currency plunged more than 6% in just two minutes — to the sudden dive in U.S. Treasury yields two years earlier, such events are becoming more common as liquidity dries up amid the rise of computerized trading and the pullback of traditional market makers.

    The sidelining of active money managers is particularly perilous because traders had come to rely on them to provide liquidity as traditional market makers are weighed down by increasingly onerous banking regulations. When these fund managers lose market share, prices become more closely aligned to what others — such as hedge funds — are willing to buy and sell at.

    It "can't be a good thing" when short-term investors such as hedge funds have more influence on prices "because they are not looking at the fundamentals of the economy," James Athey, an investment manager at Aberdeen Asset Management, said in a Bloomberg Radio interview in July. "They're just looking at price signals."

    Hedge funds are "looking at trading situations where they can make money today, or this week, this month," said Alistair Haig, who teaches finance at Edinburgh University and has worked at Baillie Gifford & Co. and Kames. "That's not great for the market because prices may be determined by short-term views."

    This is not the first time that hedge funds' influence over markets has come in for criticism. Characterized as the Masters of the Universe in the 1980s, they'd taken a chunk of the business of old-money bankers by the mid-2000s with the sheer size of their investments.

    Now, hedge funds are losing market share along with other active managers as their $3 trillion industry is pilloried for high fees and subpar performance by critics ranging from anti-capitalist protesters to billionaire Warren Buffett.

    Mr. Singer, the founder of Elliott Management Corp., warned of the dangers of passive investing in a letter to clients last month, saying it damages markets because it doesn't discriminate: If bad companies attract investment along with good companies, he said, there's little incentive for them to create shareholder value.

    Active money managers who contributed to the Financial Conduct Authority's recent study of the $9 trillion U.K. asset management industry echoed these complaints. They told the regulator that the popularity of passive investing risks allocating money to larger companies at the expense of smaller ones that are less represented in indexes.

    They also warned hedge funds' involvement in price setting is "leading to larger divergences between prices and long-term values," according to the June report.

    Yet critics of active management characterized the industry's complaint as an attempt to mask its failure to deliver value and retain clients in a market where unprecedented quantitative easing is damping price swings while sending stocks to record highs.

    "It's the last roll of the dice," said Alan Miller, founding partner and chief investment officer at London-based wealth manager SCM Direct. Mr. Miller is a well-known campaigner against hidden fees in the industry.

    "The active asset management industry is obviously under huge pressure because its performance has been disappointing for a long time," he said. "It's trying to cling on, with a feeble excuse to justify its existence."

    Related Articles
    Passive investment train overtakes active
    Graphic: Active management's consolidation
    Active management alive, but not everyone in on fun
    Indexing and the evolution of active management
    Morningstar: Half of active equity funds top benchmarks in last year; long term…
    Hedge fund liquidations decline in second quarter
    Factor investing making up larger portion of asset owners' portfolios — survey
    Commentary: Debunking some of the biggest investment myths
    Kames Capital director of institutional business departs
    Recommended for You
    First Eagle names CIO of new high-yield municipal credit team
    Business_Calculator_i.jpg
    Institutional clients moving to consolidate manager lineups
    handshake_5_1550-main_i.jpg
    Pacific Current to take minority stake in Avante Capital
    Carving a Path For Fixed Income Through Shifting Scenarios
    Sponsored Content: Carving a Path For Fixed Income Through Shifting Scenarios
    Sponsored
    White Papers
    2023 Hot Topics in Retirement and Financial Wellbeing
    Bonds: Shaken, but Not Stirred
    Today’s rate cycle and US equities in target date portfolios
    A Study of Allocations to Alternative Investments by Institutions and Financial…
    Unlocking Hidden Value in Japan
    The Art of the Possible in Data Automation for Institutional Investors
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • Consultants
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2023
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars