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Active management not going away, traders say in TABB Group report

Most head traders at money management firms think active and passive equity investments both will be part of institutional portfolios, according to a TABB Group report.

Fifty-seven percent of the 92 head traders at fundamental, quantitative and hedge fund firms said active management will ultimately prevail with institutions, while 20% said there's room for both active and passive management, according to a survey in the report, "U.S. Institutional Equity Trading: Adapting to the New Reality."

Only 23% said passive investment will replace active management in institutional equity portfolios, the report said.

"I was surprised that there was only 23% who thought passive would win," Dayle Scher, senior analyst at TABB and author of the report, said in an interview. "A lot of active managers are hoping for a market correction. Nobody wants a recession, but they're hoping for more volatility to boost active performance."

Also, 87% of head traders said MiFID II has affected or will affect their firms. However, only 27% said they expect to benefit from regulations from the European Union's Markets in Financial Instruments Directive II. Also, 41% are changing their fee structure, mostly to fulcrum fees or performance-based fees.

"I detected a note of panic," Ms. Scher said. "The question is, can (managers) do it, can they pay for research from their bottom line? Combined with fee compression, it's a matter of survival for many managers."

Among other survey results:

  • 97% of head traders said their firms have no plans to invest in cryptocurrency.
  • Research budgets have been cut by 31% of the firms.
  • 65% of firms are involved in a technology upgrade project.

Ms. Scher said tech development is concentrated among larger managers, but she believes smaller managers "will get there" with tech development.

The traders were surveyed in the first half of this year.