The debate goes on over whether passive investing is killing capitalism

 

For the first time  a majority of US investment funds were managed passively. 

So how much active management is truly needed for public markets?

Criticisms of passive management have been around for decades. Last week, it reached a new crescendo as the hedge fund manager David Einhorn, most famous for his successful short position in Lehman Brothers in 2008, complained in a Bloomberg interview that passive managers had broken the market. 

https://englundmacro.blogspot.com/2024/02/passive-investors-have-fundamentally.html

 The market could not possibly be managed on a 100% passive basis. 

If this were to happen, it would cease to function and price discovery — setting a sensible price for different securities so that capital flows where it can be best used — would become impossible.

As it is, index funds trust the valuations placed on companies by the market, which means sending more money toward companies that already have a lofty valuation. 

This contributes to the formation of bubbles within the market, such as the growing power of the Magnificent Seven tech stocks.

As money came out of passive funds, we might expect the distortions to go into reverse.

John Authers Bloomberg 5 February 2024

Passive Investing Resistance, Round II: Where Price Discovery Survives - Bloomberg