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To his 50,000 Twitter followers, Michael Green is an acerbic critic of the passive investing boom and the disquieting distortions it has inflicted on the U.S. stock market.
So a few eyebrows may have been raised this week when Green revealed that he’s joining Simplify Asset Management, a US$274 million issuer of exchange-traded funds. With more than US$6 trillion in assets in the U.S. alone, ETFs have almost singlehandedly fueled the passive revolution that Green reckons has made markets more fragile and helped inflate an unprecedented asset bubble.
But the move isn’t a break for the 50-year-old Californian so much as a continuation. Like his former employer, hedge fund Logica Capital, Simplify uses options in active strategies to help investors ride the upside while guarding against crashes. For Green, that’s the best way to navigate markets he says are dominated by eye-watering asset prices vulnerable to a spectacular fall.
“The more people are doing the same thing, the more you experience the phenomenon of position crowding or market illiquidity,” Green said in a phone interview. “One of the reasons why my profile has risen is because I have tapped into an awareness there’s something wrong.”
Green, who joins Simplify as chief strategist and portfolio manager, says his new employer has an “aggressive” launch schedule, with new funds already slated for next month. The New York-based firm, which started in 2020 and hired derivatives expert Harley Bassman earlier this year, has listed nine products in less than eight months.
The largest is the US$143 million Simplify U.S. Equity PLUS Downside Convexity fund, ticker SPD, which tracks U.S. stocks while seeking to boost performance during drawdowns. Like other Simplify funds, it uses options to deliver convexity, roughly defined as accelerated moves in response to market swings.
Green has become a popular, if prickly, presence across social media, trading barbs with the likes of AQR Capital Management’s Cliff Asness. He’s also delivered his views on market structure to audiences like the Federal Reserve and the International Monetary Fund.
In a nutshell, his theory is that passive investing is inflating a historically-unprecedented equity bubble that will crash when inflows inevitably flip to outflows. In the meantime, the relentless addition of money to index funds benefits large-cap momentum strategies at the expense of other investment styles such as value.
It also increases correlation among index members, reduces market depth and creates an illusion of underperformance for active managers.
These views have turned Green into an advocate for the idea that indexing has undermined market efficiency and invalidated longstanding investment styles. The amount of cash in passive U.S. domestic stock funds overtook assets in active equity products in 2018, and now accounts for 54 per cent of the total, according to Bloomberg Intelligence.
There’s little evidence that this tide is turning, though ETFs have also become more exotic lately, spurred in part by a rule change relaxing restrictions around the use of derivatives. After years of being relegated to second-tier status, active funds are also enjoying a surge in popularity.
Ironically, that may mean Green gets his biggest megaphone yet at a firm harnessing a product that has come to symbolize the indexing boom.
“The recent rule changes allow us to democratize that and introduce these strategies to the much broader population,” he said.