Investment

Chart of the Month – The rise of passives

by Caron Bastianpillai

The rise of passives

How the role of ETFs has evolved in an increasingly efficient market

Not a month goes by without an article in the press criticizing the high fee structures of both hedge funds and traditional long only funds and their underperformance in comparison to their benchmark indices.  It comes as no surprise that ETFs have surpassed hedge funds in terms of total assets under management since the end of 2015 as they have become increasingly competitive in terms of pricing.

 

The rise in passive investing has clearly made active management more challenging, particularly in a rising market, which we have had since March 2009 (the second greatest bull market in modern history). To illustrate this, there have been numerous studies produced by the likes of S&P Global highlighting the fact that over 70% of equity managers underperform their benchmark net of fees over 10 years. The record is far worse for investment grade bond fund managers. With an increasing number of competitors within the investment community chasing the same opportunities (particularly in the US) it has become increasingly challenging to generate Alpha. Violent sector rotations have also become increasingly prevalent in equity markets creating significant challenges for active managers. Where passives may run into trouble is during sideway markets and is when active managers should be able to outperform.

 

During the past decade, it is estimated by JP Morgan that passives and quants have increased their share of equity trading volumes from less than 30% to around 60% dwarfing the volumes originating from fundamental discretionary managers. This partly explains the low levels of stock dispersion and high levels of correlations between stocks which makes it very challenging for active managers to outperform. In addition, it is becoming more difficult for active managers to compete against passive managers in terms of operating expenses not to mention the cost of regulation and technology. The low cost model no matter what the industry, is based on generating volumes and passives are no exception with the market leaders cutting fees with the goal of increasing their value proposition. Although they may continue to gain market share from active managers as investors realize the fact that many of their active managers underperform in the long run one should wonder what would occur if global markets had a massive pullback following a bull market that has 101 months in the making (the tech bubble that ended in March 2000 lasted 113 months!). The inevitable question arises as to who will be on the other side of the trade as there is bound to be an overshoot to the downside when everyone sells on panic mode. Together with trend following CTAs and the more fashionable cocktail of risk premia strategies out there which will tend to sell equities in a market downfall the wakeup call could be deadly. ETFs have clearly become more complex over the years and given the low levels in the VIX, leverage has increased in the aforementioned range of products. They have also become very creative; there is an ETF that is based on the inverse performance of the VIX which was up over 100% YTD (to the first week of August) and in the top 30 of the most traded securities. Creativity has no limits but could also be an accident waiting to happen!

 

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Antonio Mira
CHIEF FINANCIAL OFFICER, MEMBER OF THE EXECUTIVE COMMITTEE

Antonio Mira joined NS Partners in 2006 as Group Chief Financial Officer. He heads the corporate functions and is involved in coordinating and implementing the decisions of the Executive Committee.
An experienced bank auditor, Antonio started his career in 1995 with Arthur Andersen, where he worked for some 7 years before joining Ernst & Young in 2002 as a Senior Manager.
Antonio is a Swiss chartered accountant and a Business graduate of Lausanne University (HEC).

Sébastien Poiret
DEPUTY HEAD OF WEALTH MANAGEMENT

Sébastien Poiret joined NS Partners in 2008 and manages funds of hedge funds and private client mandates. He also oversees the development of the Group’s offices in Mauritius.

Prior to joining NS Partners, he served as a Trader, Head of Manager research and Portfolio Manager in the USA and Switzerland for a single hedge fund (1998-2004) and for Optimal (2004-2008), Grupo Santander’s fund-of-hedge funds operations.

Sébastien holds a Bachelor’s degree in Corporate Finance from the ESPEME Business School (EDHEC Group) and an MBA in Finance and Economics from the Institute of Business Administration, both in Nice.

Abir Oreibi
BOARD DIRECTOR

Abir Oreibi joined the Board of the NS Partners Group in 2018, where she brings her truly international perspective and rich experience.
Among many other ventures, Abir set up Alibaba.com’s first European office. After living and working in Shanghai, Hong Kong, Bangkok and London, she now lives in Geneva, where she is CEO of Lift Events, an organization that identifies technology trends, their business and social impact through the organization of events and open innovation programs. Issues related to the challenges and opportunities created by new technologies as well as the strategic responses from organizations are at the heart of Lift’s activities.
Abir holds a BA in Political Sciences from the University of Geneva. She is an investor, and member of advisory and innovation boards.

Romain Pidoux, CAIA

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Romain Pidoux joined NS Partners in 2011 and heads the Group’s Risk Management.
He started his financial career in 2005 as Head of Quantitative Analysis for a Swiss Family Office, selecting funds and managing portfolio allocation. In 2008, he switched to the alternative world and joined Peak Partners as hedge funds analyst.
He is a Chartered Alternative Investment Analyst (CAIA) and holds a Master’s degree in international relations from the Graduate Institute of International Studies at Geneva University.

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