Bloomberg Columnist Michael Sesit warned last week that mutual funds and hedge funds better watch out for an invasion by ETFs. He quotes one expert as describing ETFs as “The Blob” from the 50’s sci-fi movie that consumes everything its in path.
He picks up on a theme espoused by his late colleague, Chet Currier in a December 2006 column on how mutual funds may someday become “obsolete”, when he observes:
“To some degree, index-linked products are already eating active managers’ collective lunch. Based on the almost $1 trillion invested in index-based products in the U.S. — up 2,610 percent since 1993 — the active-management community is losing about $12 billion a year in management fees, [Adam] Sussman [of the Tabb Group] says.”
But throughout the column he paints hedge funds with the same brush:
“Lower expenses, the failure of most active-mutual fund managers to beat their benchmarks, the growing number of thematic and specialty ETFs, and the funds’ flexibility suggest they will attract investment that otherwise would flow to actively managed mutual and hedge funds.”
Hedge funds, bastions of active management, the anti-thesis of closing indexers, losing assets to basic ETFs? Not quite. Sesit quotes an expert who says:
“If hedge-fund replication is even partially successful, billions more in management and performance fees could be transferred from managers back to investors.”
Although Sesit says ETFs pose a threat to both hedge funds and mutual funds, he seems to keep his sights set squarely on mutual funds:
“Even more insulting is paying top dollar to an active fund manager who, in reality, is little more than a closet indexer, someone who is paid to actively manage but does little more than try to shadow his benchmark.”
Hedge fund replication may or may not catch on, and it may or may not be delivered in ETF form. The ETF as we know it, represents little if any threat to hedge funds.
The Blob was horrific indeed. It consumed everything including the diner where the film’s leading man, Steve McQueen, took refuge. However, as McQueen inadvertently learns when he uses a fire extinguisher near the creature, it is unable to consume anything cold. Apparently, it eats all objects somewhat similar to itself, but recoils at anything truly different and unfamiliar…