The flow of money from actively managed funds to index-trackers is one of the dominant themes in finance right now.
US exchange-traded funds now have close to $ 2.4 trillion in assets, according to the Investment Company Institute.
Actively managed funds, in contrast, have been losing assets at a fast clip, with active equity funds seeing close to $ 150 billion in outflows so far in 2016. Hedge funds, meanwhile, continue to struggle. There has been a net $ 77 billion outflow from the hedge fund industry so far this year, according to eVestment.
Performance, or the lack thereof, is at the heart of this. Actively managed funds offer the promise of alpha, or benchmark beating returns. The problem is that they’re failing to deliver that. Let’s look at the charts.
Just one third of active managers are beating their benchmark
Active fund performance has really been pretty poor. According to research from JPMorgan, just one third of active managers are beating their benchmark.
More than half of all funds are 100 basis points, or 1 percentage point, below their benchmark. A significant group, making up 44% of funds, are 250 basis points or more below their benchmark.
Hedge funds are having a really tough time
Hedge funds are at the wrong end of the return charts, with the average hedge fund returning 4%, less than the Russell 2000, Gold, the S&P 500 and MSCI Emerging Markets.
“The average hedge fund has returned 4% YTD compared with 9% for the S&P 500, on pace to lag the S&P 500 for the eighth straight year,” Goldman Sachs said in a note.
The trend is clear
Active equity funds have lost $ 148 billion in assets in 2016 so far, with passive equity funds picking up $ 57 billion in inflows.
“On a trailing 12 month basis this rotation from active into passive is the highest on record and has been accelerating,” JPMorgan said in a note.