The #TyrannyOfTheIndex Why the Reports of the Death of Active Management & Hedge Funds are Premature

Let’s establish some facts that help explain the #TyrannyOfTheIndex and why we have these cycles of #DeathOfActiveManagement & #HedgeFunds

Tax Act of ‘86 started movement from DB plans to DC plans & huge flow of Pension $ into Mutual Funds where non-professionals made decisions

Since non-professionals had no expertise picking winning funds industry built around idea paying low fees was something good & could control

Passive/Index cheapest to implement (lowest fees), but had to gather huge assets to make same profit as active mgmt needed scalable strategy

Cap Wgtd Indexing was solution! Dirty little secret is it’s an active strategy. Buys more of things as they get more expensive… #GreatIdea

Best part, Cap Wgtd Index is momentum strategy, outperforms when stocks are rising so attract huge amounts of $ when people feeling good…

Small problem is Cap Wgtd Index guarantees you have max exposure to exactly wrong sector at exactly wrong time… Tech ‘00, Fin ‘08, ENR ‘14

So since beginning of #NewAbnormal in 2000, $SPX Index Fund has delivered 3.6% CAR while #HedgeFunds delivered 7.5% CAR with 1/2 the Vol

So clearly it makes sense to sell all your #HedgeFunds today and load up on #IndexFunds since valuations are 2nd worst of all time after ‘00