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Comment by jorblumesea | Hacker News Reader

If you bought an actively managed fund 30 years ago, it was literally an index fund with more fees attached. Active managers actually just index, but try hard to obfuscate this fact to justify their high fees. If you dive into their books, they are basically buying the market. I think it begs the question, how active was/is active?

The math is clear, you are statistically unlikely to beat the market.

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But, what if everybody only buys index funds and there arent any active players anymore ? I am not an expert in this field, but I do feel that the passive nature of index funds has been benefiting greatly from the actions of active investors.

No one really knows, to be honest. But, many "active managers" were indexing before indexing was widespread, so it's unclear how much of a real change this is. Even hedge funds use index funds to back some of their riskier moves and it's common to use a blend of indexes and shorts. It really begs the question...how active was active before wide spread indexing?

It's not really as binary as many perceive. It's not as simple as active vs passive. The future is probably some kind of balance between active and passive.

Yep, if everyone went passive, it would probably become a problem. But currently, less than 18% of global stocks are owned by index investors [1]. And there's likely an equilibrium point between 18% and 100%, where both active and passive investment make sense.

[1] https://www.reuters.com/article/us-funds-blackrock-passive/l...

The more people invest in index funds, the more opportunities for active investors. The market balances itself naturally.

If everyone invests passive, you could make a ton of money by buying companies which are worth more than their stock or just give you an extremely high dividend.

A company's dividend has zero bearing on the fair price of its stock. Profits do, but that's a separate decision from dividend. Any money a company makes is either invested in growing the business (increasing the stock's value), or returned to investors, and as long as the investment makes economic sense you don't care either way.

Dividends vs stock buybacks are a wash economically - if you look at cash flows, they both reduce the market cap by the cash given to investors. It's just that dividends reduce the price of the stock directly, while buybacks reduce the number of shares outstanding.

> It's just that dividends reduce the price of the stock directly

Dividends reduce the price of the stock directly because there is an active market. Once the dividend is paid out, the stock price is decreased by the dividend because this is what market makers are willing to pay now.

Without any active market, paying out a dividend would not influence the price, because there are no market makers to begin with.

This is of course absurd, so there will always be an active market.

Philosophical Economics has a thoughtful essay on this: https://www.philosophicaleconomics.com/2016/05/passive/

I’m going to argue that the trend towards passive management is not only sustainable, but that it actually increases the accuracy of market prices. It does so by preferentially removing lower-skilled investors from the market fray, thus increasing the average skill level of those investors that remain. It also makes economies more efficient, because it reduces the labor and capital input used in the process of price discovery, without appreciably impairing the price signal.

Some of them do beat the market. They are also producing returns that are more robust to a downturn. So even if they dont match the S&P performance, in a downturn they dont lose as much as the S&P does. It's difficult to compare index funds to hedge funds, they have different purposes. When the market is always going up, it looks like a scam.

Hedge funds are also statistically unlikely to beat the market and finding one that does requires a huge capital buy in that few workers can make. You're talking 250-500k minimum buy in. Hedge funds have chronically underperformed for the last 10-15 years. Now that so much information is available, much of the market performance is priced in now.

Once again, the best bet for the average person is an index fund. On a 30 year timeline all of these blips are smoothed out. If you can afford top level financial firms you're probably way wealthier than the average person.

Did they beat the market because they are actually better investors, or did they just get lucky? There are so many hedge funds now that statistically a few of them are guaranteed to have long lucky streaks.

If you could decide this accurately, then you would have a strategy for your own hedge fund.

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