Is The Active Money Management Industry Becoming Extinct?

There has been a lot news lately about the shift in trends in investors attitude and capital, towards passive investments and passive managers, compared to the active money management style funds.

Why The Trend Has Changed For Active Managers?

Based on the data since Dec 2008 investors have not been kind to the active money managers as capital flows (see chart below) trend has been falling. Looking at the chart the active funds have lost close to $400 billion in funds compared to passive funds who have gained around $1.4 trillion since Dec 2008.

The reasons for the trend are pretty simple actually, over 85% of active managers have under performed the market over a 10 year period after fees. Which brings me to the next reason why they continue to see outflows. Active managers charge significantly higher fees on investors money, with up to 20% performance fees charged on top of the standard management fee by hedge funds, if they outperform a particular investment benchmark. Which means even if an active manager beats the market the investor usually ends up making less after fees than if they put their money to work with a passive fund.

Click chart for source: Zerohedge.com

Hedge funds which form part of the active money management industry have also struggled, even as global equity markets are close to record highs. June and July this year were their biggest outflow months this year (see chart below). This explains why many hedge funds, some who been around for 25 years have made announcements this year to close down completely and return the money to investors.

Click chart for source: Zerohedge.com

Can Active Managers Survive The Trend?

In this video below, they assess the reasons for the shift in outflows into passive asset management styles. The video also outlines what she believes to be the future for active money management industry and its role in the investing marketplace.

There Is Still Hope For The Industry

Here is another take on hedge funds this time and the headwinds they have faced. The guest on the show makes a good point that, not all managers are the same and they do have varying performance and volatility.

Going forward he believes that hedge funds can become more valuable and practical when a correction occurs in the market, compared to a long only passive manager. This is because hedge funds have the ability to profit from down turns in the markets by shorting individual assets or indices.

That last point makes more sense than ever, since the market has been in a bull market since 2009. The economic indicators in the US also point to a recession either already starting to take hold, or its about to hit the US economy any time now.

To see the recent article where I cover whether the US is in recession click: Is the US in a recession?

Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

Sources:

Bloomberg.com
Zerohedge.com
Stockspot.com.au
Ft.com
Youtube.com