Wall Street Says Passive Investment Is Ruining the Markets: By Luke Hatkinson-Kent

Index funds and exchange traded funds are growing in popularity among investors, and Wall Street is starting to see this as a problem. A recent report showed that there is $1 trillion more invested in ETFs globally right now than in hedge funds, and one of Wall Street’s biggest names, Paul Singer of Elliott Management, has been among those who have spoken out on the way this is affecting investment.

Devouring Capitalism

“Passive investing is in danger of devouring capitalism. In a passive investing world, small shareholders have little-to-no voice and no realistic possibility of banding together, while the biggest shareholders have no skin in the game so long as the money manager does not underperform the index.” Paul Singer stated in a newsletter sent to investors.

He is not the only one speaking out on this topic. Hans Redeker of Morgan Stanley has also recently expressed concern that passive investment strategies are having a marked effect on the markets, with investors getting into a less responsive ‘herd mentality’.

More investors, Less Active Investment

It has been clear that, in the internet age, more people are interested in investing and share dealing, and a lot of people follow the markets and are interested in spread betting and CFDs as well, and the uptake of platforms on sites like LCG is a testament to this. However, while more people are investing, this means more people are seeking managed investment too, and those without the kind of money to have sought out managed funds in the past now look to ETFs and index funds because they offer little or no trading fees, and can make for a smart investment choice. Index funds have been around since the 1970s, but ETFs only really became popular in the 21st century as people began to seek out shrewd managed investment where the fees didn’t eat away at their more modest capital.

This undoubtedly changed the world of investing, and it is understandable that passive investment is something that those who aim to beat the market rather than perform alongside will see as a negative.

However, it is difficult to see this changing, as ETFs and index funds do offer something that lower tier investors can get a lot of benefit from. It will be interesting to see if anything comes from the protestations of hedge fund stars about the rise in passive investment.

Source; Luke Hatkinson-Kent


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