[White Paper] Active Management Is in Trouble (Again)

Active versus Passive Management Post Financial Crisis Chart

Active’s failure to outperform during the COVID-19 crisis will drive assets to passive managers – Can active funds innovate in time to retain AUM?

By Jeffrey Corrado, Sean Kruzel, and Evan Schnidman, Ph.D.

Abstract: COVID-19 has exposed cracks in the foundation of active asset management. Like the financial crisis more than a decade ago, the Covid crisis has highlighted that despite claims that their investment philosophies mitigate downside risk, most active asset managers fail to outperform their benchmark, especially in times of crisis. Read the full white paper.

This failure to outperform has driven capital from active to passive. Analysis from Passiv.AI indicates that in late 2009, immediately after the financial crisis, passive ownership spiked by 4.5% of total AUM in just one quarter. This trend of assets moving from active into passive vehicles has continued at every subsequent period of market volatility, especially during and immediately after a significant selloff. We identify early indications that a re-allocation of assets is already taking place in light of the Covid crisis.

Active asset managers are now facing outflows as they struggle to protect investor capital from downside risk. In order to combat this phenomenon, we identify how active managers can use modern technology tools to compete with passive vehicles. The paper concludes by highlighting how active managers can adopt novel technology and methods to enhance research capabilities, streamline their investment process, and increase returns.

Sean Kruzel

Based in Boston, Sean is a portfolio manager, MIT grad, and founder of Portformer. When he’s not investing or programming, he’s probably sharpening his skis for the next icy, New England snowstorm. Check out his full bio here: https://www.portformer.com/our-team

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