Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Few people thought Steven Cohen and passive would ever appear in the same sentence. Until now.

Cohen, the hedge-fund manager who became a billionaire by actively trading and betting on stocks, is funneling money to Acorns Grow, an app maker that encourages users to regularly put their spare change in a basket of exchange-traded funds, according to a Wall Street Journal article. Most ETFs are passively managed, meaning that they simply seek to replicate the returns on an index of stocks, bonds or other assets rather than outperform a benchmark.

Cohen's investment in this company is just $2 million, delivered through an early-stage venture fund backed by his Stamford, Connecticut-based family office, Point72 Asset Management. That's a negligible amount considering that Cohen is one of the richest people in the U.S. But this gesture has greater significance.

Even one of the most well-known active money managers, who posted 30 percent annualized returns before he was sidelined after his original firm, SAC Capital, pleaded guilty in 2013 to securities fraud, believes that passive management may have more relevance for younger investors than actively managed funds.

In other words, the trend away from human judgment toward passive investments is going to continue, leading to further restructuring in the investment-management industry. Already in the past few years, passive funds have experienced huge inflows while active ones have suffered withdrawals. While there are spots where active management may regularly outperform going forward, it's hard to see what can change this broader trend toward ETFs. 

Meteoric Rise
ETFs have experienced a much sharper increase in assets than mutual funds in the past decade
Source: ETFdb.com, Investment Company Institute

That's a much deeper interpretation than Cohen's team would give to this investment. Pete Casella, a partner at Cohen's Point72 Ventures, said the stake was "not an existential call on the future of passive investment" but simply an understanding that young investors who bet on one stock and lose may be turned off from investing forever, according to the Wall Street Journal article.

But this is exactly the point. Younger workers have come of age at a time when passive funds have generally outperformed actively managed strategies across all asset classes. Younger workers know they can't count on public or corporate pensions to support them when they retire. Many are not looking to hit an investing home run; they just want to avoid losses and build enough for the future.

Cohen himself doesn't have particularly encouraging words when it comes to the future of human judgment. 

"Frankly, I'm blown away by the lack of talent," he said earlier this year at the Milken Institute Global Conference in California. “It’s not easy to find great people. ... Talent is really thin.”

Lagging Behind
Hedge funds have lagged behind broader benchmarks for years, making them less attractive to many
Source: HFR, Bloomberg

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Meanwhile, Goldman Sachs expects hedge funds to lag behind broad stock indexes yet again this year, for the eighth consecutive year. So it's hard to see the draw that's going to bring younger investors back to active funds, which charge significantly higher fees and haven't justified that expense in recent years.

Cohen is a smart man. He's actively making a choice to explore passive.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net