In recent years, institutional investors have had a nearly insatiable appetite for alternative investments, a trend widely expected to continue for years, possibly even decades, to come. But a new report from the TABB Group throws cold water on that thesis, warning hedge funds and other active asset managers of the threat posed by index-based investing.
Report author Adam Sussman, research director at TABB, calls the appetite for index-based investments “nearly insatiable,” noting that active managers are already losing out on some $12 billion in management fees due to the $1 trillion U.S. investors have put into index-based products. That pain has so far been felt mostly by traditional asset managers, such as mutual funds, but Sussman cautions that hedge funds, which manage some $2 trillion globally, are not immune.
“There’s no slowing down the tide of indexing,” he said. “Pension plans need better ways to measure the performance of alternative asset managers. ETF, exchange-traded note and other index-based managers will need more products in the pipeline.”
Specifically, hedge fund replication strategies could put a serious crimp in hedge fund managers’ styles, costing them further billions in fees. Sussman says that by next year, some 70% of all pension plans will be utilizing customized benchmarks. And there are plenty available: He estimates that there are 48,256 possible indices versus 40,365 publicly-traded companies.