Authors: John Galakis
Addresses: Iniohos Advisory Services, World Trade Center II, Route de Pres-Bois 29, 1215 Geneva, Switzerland
Abstract: There has been tremendous growth in the assets managed through passive strategies both by institutional and private investors, especially over the last 20 years. This trend is not expected to abate anytime soon; on the contrary, it is projected to intensify, as investors have been increasingly rotating out of underperforming and higher cost active strategies into lower cost index-related ones. Besides cost, index-linked investing exhibits numerous benefits. There is, however, ample empirical evidence that shows that it is creating widespread price distortions that have considerable impact on individual security and market risk/return distributions. This 'dark side' of passive investing has sizeable repercussions for corporate investing and investor portfolio allocation decisions. In this environment, the presence of 'true' active managers is essential, as they could offset part of the distortions.
Keywords: passive investing; active investing; active managers; index premium; index turnover cost; co-movement; price detachment; exchange traded funds; ETFs; volatility spillover; systemic risk; fund flows; market efficiency.
International Journal of Portfolio Analysis and Management, 2021 Vol.2 No.3, pp.199 - 223
Received: 12 Nov 2018
Accepted: 28 Dec 2018
Published online: 04 Jun 2021 *