Hedge Fund CIO: "Expect Enormous Losses In The Next Correction As There Is No Price Discovery In Index Investing"

Tyler Durden's picture

In today's excerpt from Eric Peters Weekend Note to clients, the CIO of One River Asset Management focuses on the one topic that is first and foremost on the minds of the active investing community: the unprecedented shift from active to passive management, and what it means for not only the industry, but for markets during the next "normal correction."

“Each day since the election $1bln has moved from active to passive management,” said VICE, standing in the shadow of America’s mountain of private wealth assets. When you buy the S&P 500, you pay the prevailing price for every one of those stocks.



“There is no such thing as price discovery in index investing.” And there will be no price discovery on the downside either. The stocks that have been blindly bought on the way up will be blindly sold.


“When these markets do finally have a correction there will be no bid for many of these stocks.” 


“The people who are indexing now are the same ones who were selling in 2009,” continued VICE, agitated. “I just spoke at a conference filled for wealth advisors from all the major players. They say the same thing - today’s buyers are not long-term investors.” They’re guys who put $1mm into index ETFs.


“When they lose 6%-7% and decide to sell, who will be on the other side of those trades?” And the stocks that will be savaged worst will be the ones that lagged the indexes on the way up. “It reminds me of 2000, when people piled into the QQQs.” 


“I don’t know when the next major crisis will hit, no one does,” admitted VICE. “But I do know that even in the next normal correction, the market’s losses will be amplified enormously by this move away from active management.”


$500bln has shifted to index investments, distorting the way equities are valued and the historical relationship between short sellers and buyers. This flow creates artificial demand for poor-quality securities that have few natural buyers. “And now even Warren Buffett is telling investors to shift to passive.”

And a bonus: the world as seen through the eyes of active managers.

 “Long-only investors have the longest memories,” he said, just back from a grueling march through countless offices. “They don’t believe bond yields will ever rise.” Secular stagnation has cast a long shadow. “The age of disruption has shifted their psyche too.”


Every day their assets decline, fees too. Their job future is more uncertain today than in 2008. So much for the return of animal spirits, the running of the bulls. “And these guys are not alone. For all the talk of bullishness, it’s hard for anyone to be euphoric when our industry is in such decline.”

We doubt, however, that as the active managed industry slides into the sunset that the rest of the world will shed too many tears.

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silverer's picture

"There Is No Price Discovery"
Which was the original purpose of the markets. So, the markets aren't even the markets anymore. They are a clearing house for price manipulation.

The_Juggernaut's picture

Keep saying the same thing, someday you'll be right.

knukles's picture

The whole point of an index fund is that everybody by and large except for a few outlier managers, consistently out preforms any index.
Notably the Hedgies!
So of course they're gonna tell ya it's a bad deal.
And of course, they've always gotten out of the way of markets and beat them....  not.

The manager is no more capable of making timing decisions than the individual (Who is always raped)
So I should put my money under  2% and 20% regime so I can lose money faster.


fx's picture

There will be no significant drop and downside anytime soon. We'll get another two decades of financial repression. The Fed's rate hiking cycle is already half-way through.
Decent yielding dividend compounding stocks will be king going forward and of course some individual stocks will make you a fortune or wipe you out (Im looking at you Tesla, for the wiping out part).
Index investors will not be off that bad. There will be shallow dips along the way, but no major ones. everything will get bought quickly - by investors or the PPT.
Equities world wide as well as real estate will climb to even more ridiculous prices over the next 2 decades amid nominal short-term interest rates between -2 % and +2 %. We will see new lows in the 10year yields, too.
All that talk of " IF a correction comes, then xyz will happen", misses the point. It will not be allowed to come.

saveUSsavers's picture

FKING LOSERS PAYING  GAAP P/E 30 = 50% correction before over

Theta_Burn's picture

Well, the task groups are enroute to Syria, and NK, that'll cover this shit up nicely...

0valueleft's picture

Beat me to it Burn, hope it's as obvious to the massholes, yeah right!

0valueleft's picture

Blue tarps in the Hamptons this year? I doubt it. Drop those fucking bombs...BOOM BOOM BOOM, if this Syria shit esculates, you know the crash is coming in 17. Good luck to everyone.

Yukon Cornholius's picture

It's all funny-munny anyways so who gives a shit?

red1chief's picture


“When they lose 6%-7% and decide to sell, who will be on the other side of those trades?”


The Fed.

Ban KKiller's picture

Yeah, why cnange horses in the middle of a flood? 

alfredhorg's picture

Active investing is good, but only if you do it yourself and depend on the advice of others as little as possible.  I have been investing for myself since 2006 and have done very well even though I sufferred in 2008 (I stuck to my convictions and bounced back in 2009).  I track the dollars that I put into my IRA, track the dollars that my IRA is worth now, and post it all for the world to see:


Atomizer's picture

We always look out for you YouTube content creators. I bring a gun to party. Keep your strong hold. Don't back down. Never a Google account for me. Eric can perform Autofellatio. Sing Alphabet.com gaging noises in our 26 alphabet language. 

@PatreonSupport how is this ok? - YouTube


Solio's picture

Investors rely on price-makeuppery long time now.

Atomizer's picture

It was called market to market back in day. 

Solio's picture

Oh, price butt-fuckery!

Xena fobe's picture

This might matter to anyone not turned to ashes in Trump's WWIII.

_RRR_'s picture

don't worry, the FED will save it. They have to. They'd be buried alive if they don't.

Expect the "trade" to go on as long as our ... establishment is live

slingshot's picture

This article provides a good analysis of what would trigger a correction namely an end to the massive QE programs of ECB BOE JCB BOC   All printing massive amounts of free money to their own benefit. Only hyperinfation will stop them.  http://www.cnbc.com/2017/03/22/heres-what-could-tip-this-market-into-a-m...

Atomizer's picture

At 50 million € to bailout a extinct scumbags of thieves. Hate crime fined to talk against the European Government. Will fuck up your blog pages, you can't touch us. Kisses from United States of America. 

Atomizer's picture

We have bots and proxy sites and other tools. We will hit you so hard from deep web. Your fucking heads will spin. 

Mtnrunnr's picture

All my bankster friends and my weathly friends who've made a killing in the last 2 years talked so much shit last month when I let them know my feelings on passive investing (mirroring those in this article). In fact, I haven't talked to them since then because they were such complete assholes. I can't wait for the next correction when they lose all their bullshit money.

Midas's picture

Did they sell?  I have had to put up with Amazon fanboys for a while.  I always ask them how much they have sold.  When they answer "zero" I remind them they ain't made shit. 

TradingTroll's picture

Deutsche Bank is the largest producer of ETFs. Those bond holdings in the ETFs are the toxic bond waste that DB doesn't know what to do with. DBs tower in Manhattan recently sold to the Government of Singapore for a low price because no one knows who the tenant will be.

DB will blow up and when their ETFs fail the entire sector will be painted with the same brush.

It doesn't help matters that in the August 24 2015 correction the DIA ETF (not an ETF by DB) was mispriced (discounted by a few percent against price of underlying components).

In the next, more violent, Global Financial Crisis, problems like DB-backed ETFs and ETF mispricing will create even wider spreads. Shorting ETFs may be a strategy.

Atomizer's picture

Derivatives holding clearing house. Wake up. That's why they pulled 6.2% in ETF gains.  

Offthebeach's picture

Price?  What ever Maiden Lane orders them to be!

Consuelo's picture



The Financial Services Industry is arguably one of the largest bubbles of all time, hiding in plain sight.   And has been for long about 30 years.  

christiangustafson's picture

1st real bounce at the 1620 level on the S&P



Yes, the Fed will cut rates in June.

buzzsaw99's picture


“But I do know that even in the next normal correction, the market’s losses will be amplified enormously by this move away from active management.”


I just want to ask you one thing, cowboy. If you're sitting here, and he's sitting all the way over there, then how's he gonna get his hand into your pocket? Oh, but I guess he has that all figured out... [/Jackie, Midnight Cowboy ]

Scuba Steve's picture

Duh Eric, The circuit breakers were built for price discovery ... those fukkin switches will go on and off as much as James Simons' macros tells it to.


LeftandRightareWrong's picture

What has been "discovered" are the fees and relative underperformance of active management.