IS GLOBAL PASSIVE COMES TO AN END...HYBRID IS NEXT ?

The current Bull market has been one of the lengthiest bull markets of the History. We all know that time somehow is getting ready for some cool off for the Bull. Well, whatever goes up has to come down. The market is too much fatty and it needs to shed its fat.  The market has been fuelled with huge amount of cheap money.  Autopilot fund management is coming to an end based on the current various statistics across the global market.   Genius fund management era got destroyed in 2008 and hence Passive fund management grew up like anything. The reason being that smartness of fund managers get defeated when economic theories keep changing. Smartness is short-lived hence without much experiment the investment flowed into passive funds.  All the stimulus and zero interest rate monetary policy came up at the back of buyback of shares and nothing towards long-term sustainable business or assets.

The recent hunger for the same is revealed through the U.S. investors has plowed money into U.S. stock exchange-traded funds at a rate of almost $12 billion a month since the start of 2017.  This number is 5 times as much as seven years ago.  On the other had Vanguard, State Street, and BlackRock, which manage 80 percent of the $2.8 trillion invested in U.S. stock ETFs. This speaks about the hunger for the growth of ETF matching with the growth of the S&P 500 in the last 9 years.

The index funds have been the most favored since 2009 when the markets were giving return to the tune of 20% annualized. Well, these days are over currently under the regime of rising interest rates and trade war and overstretched valuation gaps.  On the other hand, the Hedge Fund Industry picture is not rosy enough for the long term. Hedge funds recorded quarterly outflows of $1.2bn in Q1 2018, ending a streak of five consecutive quarterly inflows.

In my research, I find that in the coming days as equity markets growth will not be repeated as historical numbers have been and at the same time as hedging opportunities are coming down I find Balanced Funds or Hybrid Funds opportunities will be opening up in the Global Markets in the coming days. The global market would come up with Balanced Funds as passive funds are tired. The current market does not support passive funds in the long term. All the momentum of 20% annualized growth has a slowdown and the ongoing trade war followed with a slowdown in manufacturing due to the former would spook huge bottlenecks for the market to grow from here.  Investors will look for safer products where equity markets don’t perform and this is the key place where balance funds or Hybrid funds come into place.

The mixture of Debt and Equity followed with currency spice into the products would drive the next level of Balanced Funds.  Debt to Equity shift and including currency or Gold into the same would diversify the risk and will help to balance the same.  No Fund Manager would be required in these cases since it would be a higher version of passive fund management based on macro factors again. No smartness like the Pre 2008 alpha generation focused funds.  Hence this segment would get significant growth in comings days. Across the globe, we would find these type of products being launched and will witness the shift of investments in these products.

Another grey area which will get affected is the exit point for the Private Equity investments.   As returns will not have exponential growth, long-term exits will come back and new investments will be short-lived.  New products will be the next bet for the global financial system. The back of Genius would come back again.

The S&P 500 valuation gap due to a tax cut down and other segments is too wide enough and they are slowly getting discounted as story making days are getting over. A fixed formation is the most important requirement for long-term sustainable economic growth.  Smartness is all set to come back. Debt market looks good a currently as credit squeeze comes up through interest rates other sources of debt would grow significantly. This will lead to the growth of many segments of debt papers giving an opportunity for getting the pool of investments to shift from equity to debt. Balanced Funds or Hybrid Funds would be highly in demand.   Passive fund management is all set to face decline compared to historic performance which made them grow exponentially.