Paul Singer: «Passive Investing is Devouring Capitalism»

August 11th, 20176:32 am @


In the ongoing debate over passive investing, Hedge fund manager Paul Singer takes the somewhat extreme view that the practice could prove the death knell of capitalism.

As far as the debate over passive versus active investing is concerned, backers of the former seem to have the facts to prove their preference. In the first half of the year investors pulled some $500 billion out of actively managed funds and parked them in passive portfolios.

Some active fund managers have even been forced by this trend to seek mergers with bigger rivals, such as happened with Aberdeen Asset Management, who have linked up with Standard Life.

Extreme Views From Paul Singer

Others have played down the issue, claiming there is still enough active investment business to keep everybody happy. Some active managers have even welcomed the trend, or least part of its impact, saying it sorts out the strong performers from the weak, or those who strategies are tied to benchmarks or indexes.

However hedgefund managers like Elliott Management’s Paul Singer take a more extreme and gloomy view of the trend. «There’s a danger passive investing will devour capitalism», Singer wrote recently in a note to clients, the news agency «Bloomberg» reported.

Destructive Blobs

«What began perhaps as a clever idea, has grown into a blob, which is destructive to the growth-creating and consensus-building prospects of free market capitalism,» he wrote.
Singer cites the doomsday scenario as a defense of his hedgefund strategies. What is clear is that hedgefunds are the epitomy of active investing, since their aim is to achieve a profit in all markets.

Not Proper Investing

Singer’s hedge fund rose 0.4 percent in the second quarter, bringing its performance this year to 3.5 percent, which given a 2 percent charge, doesn’t leave much left over for investors.
Singer is dismissive of strategies linked to an index or benchmark, claiming this isn’t proper investing. Proponents of index-linked products like Exchange Traded Funds have no incentive to promote company improvement or create shareholder value.

Active Means Activist With Singer

Singer and Elliott Management currently manage around $33 billion and have a highly activist profile. Two years ago it led a group of creditors seeking repayment of positions in Argentine debt, a move which helped push the country to the brink of ruin.

Another of Singer’s campaigns was a bid to buy power distributor Oncor Electric Delivery, a move with pitted him against billionaire Warren Buffett.

No Risk No Opportunity

Singer claims that in a passive investing world, small shareholders have little or no voice and no real chance of influencing their investments. «All the while the biggest shareholders have no, I repeat no, skin in the game so long as the money manager doesn’t underperform the index by more than 0.05 percent.» Only then can the client squeal.

The passive investing trend only appears stable. In truth it is fragile and unsustainable, Singer concludes in his quarterly brief.

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