Stockpickers Step Up As Passive Funds Plummet

Stockpickers Step Up As Passive Funds Plummet

almost 4 years ago2 mins

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Recent stock market declines may have alarmed “passive” investors whose portfolios track the movements of an entire index up or down. But even professional “active” investors, supposedly experts at outperformance, have been struggling of late… 😩

What does this mean?

One problem for active investors is that **S&P 500 **“correlation” is currently at a record high – in other words, the largest US companies’ share prices are moving in greater unison than at any point in the last 25 years, in theory making it harder than ever to pick individual winners.

Source: Twitter/Charles Schwab
Source: Twitter/Charles Schwab

Adding to the headache for hedge funds (active investors which seek to make money even when normal investments decline) are European financial regulators, who’ve temporarily banned the key technique of "short" selling in a bid to calm markets.

But while the world’s largest hedge funds have struggled, “quant funds” – which use sophisticated algorithms to select stocks – have, according to investment bank Morgan Stanley, only lost an average of 3% so far in 2020, compared to the overall US stock market’s 25%. And – unsurprisingly – those funds betting on volatility itself increasing have made a killing, with some up 70% this year 🤯

Why should I care?

It’s not just hedge funds: Germany’s Commerzbank drew flak on Thursday after it emerged it had moved to protect itself against stock portfolio losses by shorting the entire German market. Fellow investment bank Credit Suisse, meanwhile, is expecting bumper profit this quarter thanks to higher fees from its clients’ buying and selling activity.

It’s worth remembering that recent stock market declines may well have been exacerbated by big investors being forced to sell in order to limit their losses – and for most normal people, long-term passive investment in the overall market remains the best approach 🧐

In spite of some short-term wins for active investors recently, fewer than half of them beat the US market last year – and fewer than a quarter did so over the past decade...

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