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Passive Indexing is Corrosive to Capitalism?

03 August 2017

Paul Singer, founder of hedge fund Elliott Management, is warning investors that “passive investing is in danger of devouring capitalism.” Per this article from Bloomberg, Singer is concerned that passive investing acts as a disincentive for companies to create shareholder value or make necessary organizational changes. Most troubling to Singer is that the large passive shareholders (ex. Vanguard or Blackrock) don’t act in shareholder interests and “have no skin in the game, so long as the money manager does not underperform the index by five-hundredths of a percentage point.” As seen in the accompanying video with the article, Vanguard and Blackrock are the top two owners of 95% of the S&P 500 Index constituents. Note that Singer’s hedge fund has an activist strategy, which is antithetical to passive investing.