For the better part of the past decade, Michael Green has been on a mission.
From talking to money managers to making the rounds of hedge fund idea dinners to attending conferences geared to everyone from financial analysts to family offices — and even wrangling meetings at the International Monetary Fund and the Securities and Exchange Commission — Green has had one message: The craze to invest in passive vehicles like index funds rather than in individual stocks isn’t the low-cost, risk-free future of investing that everyone thinks it is. Instead, he argues, the growing dominance of passive investing distorts capital formation, creates market instability, and carries the potential for a crash.
Green calls ita passive bubble. “We know what happens when everybody does the same thing in markets,” he told a rapt crowd at a CFA Society Virginia event in April. The pitch is low-key and the delivery droll, but it hits its mark: “Active managers can’t have enough scale to even stand in front of it, right? It’s like leaning against the steamroller and trying to stop it.” Green calls his presentation, which he also gave in October at the annual conference run by Jim Grant and his Grant’s Interest Rate Observer,“The Greatest Story Ever Sold,” a not-so-subtle hint that he thinks it’s all marketing — and an intellectual fraud.
A former hedge fund manager with some serious Street cred (he worked for Canyon Capital and tech billionaire Peter Thiel and founded a fund seeded by George Soros), Green isn’t the first person to opine on the impact of increased passive investing. Academics have been writing about it for years, and a recent Goldman Sachs report noted that during the past decade, passive stock mutual funds and exchange-traded funds have seen $2.8 trillion of inflows compared with $3 trillion of outflows from actively managed funds. As a result, the share of passive owners for the typical S&P 500 company has risen from 18 percent 20 years ago to 26 percent today, according to Goldman.
Others acknowledge passive’s growing role in finance, but few have the fervor of Green, who has followed the analysis to his ominousconclusions. “The contribution that I made is the importance of flows,” Green says in something of an understatement, putting forth his views in a series of interviews with Institutional Investor in which he detailed how he became known as the Cassandra of passive investment — the skeptic whose warnings go unheeded.
Green focuses on the enormous amount of capital that continues to flood passive strategies and could leave the market prone to violent swings and potential crashes if the rug is pulled. For starters, he says, the percentage of the market controlled by passive investors is much higher than many realize — about 45 percent, including index funds, futures, total return swaps, and option hedging based on indices.
As they increase in importance, passive investors have become the latest group with the potential to cause market disruptions, as others have done in the past. Highly leveraged hedge funds invested in the same stocks have sparked contagion events, as have meme stock investors betting on heavily shorted names.
Consider the fact that a lot of passive money is held by individual investors in target-date funds through their 401(k) retirement plans. What happens if these investors lose their jobs in a recession or they retire and begin spending their savings, leaving few active managers left to buy stocks that might seem cheap as a result? With buyers scarce on the other side, the markets could melt down, Green suggests.
With warnings like these —and a couple of stunning trades under his belt — Green has gotten close to many hedge fund notables, including Scott Bessent, a former Soros Fund Management CIO and President-elect Donald Trump’s appointee for Treasury secretary. Bessent calls Green an “if, not when” kind of thinker. “He’s very uncorrelated and very original.”
You can read my profile on Institutional Investor here: https://www.institutionalinvestor.com/article/2e5um1swovwbm3x5yyk1s/corner-office/why-michael-green-is-known-as-the-cassandra-of-passive-investing
Michelle Celarier 