NEW YORK (Reuters Blogs) -- Wall Street is no place for shrinking violets, but even by New York standards, Jason Ader has some serious chutzpah: He said last week "the proliferation of index funds and exchange-traded funds" helps activist investors like himself make money.
These big investors are rarely holding "management accountable for underperformance and are not pressuring boards to hold management accountable for underperformance," Ader said at the Reuters Global Investment Summit.
Funds run by well known activists, including Jeff Ubben of ValueAct, Barry Rosenstein of Jana Partners, and Carl Icahn, have returned roughly 14% on average so far this year, twice the amount that the average hedge fund has delivered, partly because they cajole businesses into running their operations better, the activists say.
In principle, this makes sense. One common criticism of passive investing is that if everybody did it, then there would be no price discovery, and that the more passive investors there are, in a market, the easier it becomes to take advantage of them with a little bit of sophisticated analysis and/or activist investing.
But the point at which passive investing becomes self-defeating is a bit like the point at which the gradient of the Laffer curve turns negative, and tax hikes cause revenue losses rather than revenue gains: Both points are far beyond any state of the world that obtains in real-life America. Passive investors are still a minority of all stock-market investors and, what's more, they could easily become a majority without doing any harm to the markets price-discovery abilities. The only thing that matters is that there's a reasonably large number of active marginal price-setters. Since there always will be a reasonably large number of active marginal price-setters, no one ever need fear that the rise of passive investing is going to become self-defeating.