,
7 tweets,
2 min read
Read on Twitter
1/ Interesting model of the impact of passive investing on volatility and alpha available to active managers with a counterintuitive conclusion: the alpha available to active managers is destroyed by the dominance of passive flows 
2/ The intuitive thing is that if the market is dominated by passive players, then there are more inefficiencies available for exploitation
3/ This is true to a certain point (42% of the market in passive using this model), but after passive passes 60% of the market, the simulation becomes increasingly unstable and subject to high volatility
4/ The metaphor is to think of as a drunk person passive investors walking home being guided by his sober friend (active investors).
5/ If the drunk man (passive) gets beyond a certain size, say triple the size of his friend, then his friend (active) will be unable to keep him on the path home.
6/ The drunk man can move much faster in any direction (higher volatility), but is also more likely to get lost.
