One of the bigger trends of 2014 was that institutional investors (finally) began pushing back on hedge funds and large asset managers that charge big fees but, over the last half-decade at least, haven’t delivered value. However, much of the discussions involved lowering fees rather than walking away completely. Though that could change soon, at least according to a new report.
Institutional investors like global insurance companies and pension funds are likely to double to 40% the assets they allocate to cheaper passive index strategies by 2020, according to an adviser for the World Pensions Council think tank. That means 20% of the $55 trillion these firms control will flood out of actively managed funds over the next six years. That’s bad news for hedge funds and active asset managers.
Financial News, first to report the analysis, uncovered some stunning figures that help explain the likely trend. Passive index-driven exchange-traded funds (ETFs) gained $338 billion in 2014. Meanwhile, active U.S. equity funds, which charge retail investors an average of 1.61%, lost $98.4 billion. Passive equity funds charge an average of just 0.35%. Astonishing.
Obviously active money managers aren’t going anywhere, but ever-so-slowly institutional investors are resisting paying large fees. The World Pensions Council report came out around six months after another eye-opening study that looked at the perils of active management.
They looked at more than 2,800 domestic stock funds over a five-year period. The study was rather simple: take the top 25 percentile in terms of performance and see how the funds did through the years. Exactly 99.93% failed to book a top quartile performance for five straight years. Or, in simpler terms, two of the 2,862 funds accomplished the task.
Even more baffling, there was a greater likelihood for the best-performing funds to become the worst-performing funds and vice versa.
Hiring Roundup (eFinancialCareers)
In the latest hiring roundup, Goldman is adding headcount in pockets, one firm is actually hiring in fixed income and Cantor Fitzgerald is at it again.
When the Average Is a Lie (eFinancialCareers)
Here’s the thing about hedge fund bonuses. The average is high, but in most cases it’s the top one or two traders that take home the lion’s share.
SocGen Gets New Chairman (Reuters)
Société Générale is stripping Chief Executive Frédéric Oudéa of his chairman role, giving it to second vice chairman and Italian economist Lorenzo Bini Smaghi. Oudéa has held both roles since 2009.
When a Loan Goes Bad (WSJ)
Some of the names of the Goldman Sachs employees who set up the $835 million botched loan with Banco Espírito Santo are coming out. Jose Luis Arnaut, a member of Goldman’s international-advisory board, ran point on the deal, with London partner Antonio Esteves and other members of the firm’s securities and financing divisions pitching in. Roughly 50 employees were alerted that their involvement with the soured deal would affect their bonus. Elsewhere, Goldman has already closed one of its key trading ideas for 2015. It shorted the Swiss franc, which turned out to be a really bad idea.
Don’t Do It! (WSJ)
Note to self: don’t trade currencies on your own. Roughly two-thirds of mom-and-pop foreign exchange traders lose money every quarter.
London, So Hot Right Now. London (Bloomberg)
All of a sudden, London is the place to be. Financial services job vacancies were up 18% in 2014, hiring increased 22% in the fourth quarter alone and 65% of U.K. banks and insurers expect business to pick up in Q1, with just 6% anticipating a decline.
Comp Down at Goldman (Bloomberg)
Compensation as a percentage of revenue at Goldman Sachs in 2014 slipped to its second lowest level since the bank went public in 1999. The only worse year was 2009, when, you know, everything collapsed.
Buzz Around the Office
Rich Getting Richer (Bloomberg)
The richest 1% will control the majority of the world’s wealth by 2016. This is according to anti-poverty charity Oxfam (is there such thing a pro-poverty charity?) that was presenting at the World Economic Forum in Davos, which is being attended by a bunch of billionaires who were probably smiling during the presentation.
Quote of the Day: “Volatile volatility, these extreme moves, tend to drive people to the sidelines because nobody is able to take a view as to how they should be protecting their business. When you get these sudden swings, people don’t know what to do, activity just stops.” – Citigroup Chief Financial Officer John Gerspach on why the return of market volatility didn’t help big banks