New York (HedgeCo.net) We have featured several articles arguing the merits of actively managed portfolios versus passive strategies. One of the things we continue to point out is that the passive strategies have benefitted from the second strongest bull market in history over the last six years.
Mutual fund research firm Morningstar released a report last week that showed that actively managed mutual funds saw $156 billion leave the space over the previous 12-month period. That is the worst out flow ever for the funds, even as actively managed funds as a whole are turning in their best performance since the financial crisis seven years ago.
While the mass exodus was occurring in actively managed funds, there was an inflow of $150 billion to passively managed funds. Even with the huge shift over the last year, actively managed funds still have more assets under management with $3.8 trillion versus the $2.4 trillion in passive funds.
Just a few weeks ago we featured an article entitled “Wrong Time to Abandon Hedging Strategies” and that article was looking at how liquid alternatives seem to be losing some of their appeal as the bull market continues on.
These developments are concerning. The fact that investors are leaving active strategies for passive strategies, and then they are not putting money in to liquid alternatives as fast as they were, could these be indicative of a market top? When investors get too confident in the market and abandon hedging strategies and turn to passive strategies over active strategies, those are both indications that investors believe the market is going to keep going up.
Remember the bull market of the late 90s? How many people quit their jobs and started trading because they were making so much money? What they failed to realize is that they weren’t all great traders or investors, they were the beneficiaries of the greatest bull market in history. Now we are in the second greatest bull market in history and people are failing to see the need for active management or hedging strategies.
This could be a very bad sign for the overall market moving forward. Of course the hedge fund industry probably wouldn’t mind a correction since it tends to outperform during bearish phases.
Rick Pendergraft
Research Analyst
HedgeCoVest
