Hedge Funds shouldn’t fear “The Blob”

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…

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3 Comments

  1. Adam Sussman
    February 7, 2008 at 10:03 am

    I would like to emphasize that the point I was making in my paper was not that hedge funds are equally susceptible to the indexing blob. My opinion is that any strategy that can be broken down into a set of repeatable rules will be commoditized. An index fund, ETF or exchange-traded derivatives product, is the end-game in the process of commoditization. However, I go on to say that there are hedge funds and other active managers who will be sources of innovation within the asset management industry and they will continue to collect their sizable fees for successful new products.

    Thanks,
    Adam Sussman
    Director of Research
    TABB Group


  2. Simon Jacques
    February 8, 2008 at 12:29 am

    The potiential of Hedge funds return on investment and fees varies a lot.

    The perfect efficiency is theoric.
    The journalist only looks on active manager fees and real expected returns variation among funds.

    Some Etf sellers openly claim that active alpha management is a new Baloney !

    The same Phenomena occured in late 60’s when old-school brokers and Wall-Street named Baloney!: the new portfolio created by Eugene Fama, Markowitz, James Tobin, William Sharpe new concepts.

    Years later, they became Nobel award winner, Yale,MIT,Chigago teacher and by the recognize entire financial market.

    The next finance innovation step is on this blog… Yes, it seems a litle bite complicated with the Greek letter symbols, the philosophy of alpha, the stats but in 2015, the content of this blog will be the average knowledge taught in the business schools.


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