You will need more than Crypto and Active Management.
Our recent research and analysis suggested; that there is a compelling argument to be made for active strategies. Our major concern is how an active strategy can outperform in today’s market — which consists of a low-cost environment and high factor crowding.
Factor crowding is the phenomenon whereby several investors knowingly or unknowingly, hold the same positions in their investment portfolios.
What is an active strategy?
Active strategy means where a fund manager or an investor manages the portfolio actively. Looking at the portfolio in all market scenarios and buys or sells the securities accordingly. Whereas passive means where a portfolio is structured in accordance with the index. More of a hands-off approach.
As the access to more robust financial products becomes democratized. For active strategies to beat benchmarks, it will require a methodical approach that is supported by strong quantitative capabilities paired with a bottom-up focus on value and fundamentals.
Ingredients of complacency
Over the past decade, roughly $1.4 trillion has rotated into passive equity and exchange-traded funds, while over $1.2 trillion has streamed out of active strategies and over $2.9 trillion has moved into crypto-assets. Many believe there is no need to beat the markets, and many advisors now simply focus on capturing the returns of the markets.
We believe this kind of sentiment materializes around years of an uninterrupted run in the U.S. equity markets and serious growth of the crypto market since 2019 fueled by the influx of institutional and high net worth investors.
The S&P 500 Index, hasn’t posted a negative annual return in the past ten years and has generated double-digit total returns five times since 2008, while in 2009 and 2013 produced total annual returns over 26% and 32%, respectively, while Bitcoin since 2017 maintains a mean annual return of 408.8% and a max annual return of 1318.0%. Make no mistake: We believe these are the primary ingredients for investment complacency.
The best way to beat the benchmarks
This sense of contentment couldn’t have arrived at a worse time, as we still battle the pandemic and slow economic recovery. Most signs are pointing to a developing low growth environment and double-digit inflation, especially in developing markets.
Most investors are already looking for strategies and portfolios that can produce idiosyncratic alpha.
Where will the differentiated and uncorrelated return stream emerge? In a low return market, the best way to produce this stream is to avoid the groupthink that fuels so many investment strategies.
But most active management underperforming?
According to research, most active fund managers who employ highly active strategies will outperform in both good and bad markets when adhering to a buy-and-hold approach.
Nonetheless, underperformance is an inevitable and expected part of the return profile of all active managers, even those with the skill to outperform over the long term.
While growth and momentum may outperform in certain environments, mean reversion remains one of the most powerful tools investors have at their disposal.
Mean reversion is a financial theory which suggests that, after an extreme price move, asset prices tend to return back to normal or average levels.
It is the potential for underperformance that creates the idiosyncratic risk that value investors can take advantage of in the first place. Active strategies also tend to perform better when value beats growth; international equities strategies outperformed U.S. equities, small-cap stocks are more attractive than large-cap stocks, and crypto-assets present more opportunities than any asset class.
Crypto meets index
The increasing introduction of index funds strategies isn't having enough impact on the crypto market, and most aren’t even built for the mass market. Along the rise of passive management has been a growing tendency of crowding into certain factors. High long-term growth, high margins, and high momentum currently sit as the top three crowded factors across the market.
A systematic approach is necessary for fundamental investors to capture the full breadth of the investable universe while delivering higher active returns and tracking errors that are attributed to outperformance.
How our process relates to the debate
At, ComiBlock, we are of the view that active management will consistently generate the idiosyncratic returns that will be so critical in a low return, high factor crowding, and volatile environment.
Our analysis-driven process allows us to isolate the tails of distribution and hype to create a target-rich environment in which we look beyond the 60/40 frontier and access an assets' valuation, fundamentals, and momentum. This points us to areas of the market overlooked and underweighted by those who base and fill out their models through economic forecasts or other macroeconomic factors.
Our new frontier and bottom-up approach generate alpha-driven strategies of crypto-assets, Eurobonds, and crypto-equities which combines two characteristics rarely found together: exceptional top-line growth with very high levels of profitability and create a new efficient frontier that is completely independent of composite rankings and features all of the characteristics now in vogue as the market reshuffles amid the evolving financial landscape.
Come join us and build the future of wealth management
As financal markets continue to evolve. At ComiBlock we are building the world’s most human crypto company at the intersection of wealth management, with a single mission to help millennials and Gen-Z’s simplify their investment life.
If you’re passionate about our mission, come help us make millennials and Gen-Z’s feel good about investing.