Could it be that some index investors are (gasp!) performance chasers?

This post contains two charts. The first shows monthly factor return data for the US equity market from Ken French’s Data Library. Far and away, the best performing systematic exposure since the financial crisis has been broad market exposure (a.k.a “beta“).

Data from Ken French’s Data Library

As an index investor, you are all about the beta. The theoretical underpinning of index investing is, in fact, that beta is all that matters. Active investors (I will include the factor folks under this umbrella for the purposes of this discussion) are concerned with more than just market beta. Their portfolios target other exposures, such as value and momentum.

You will notice that during the early 2000s, when a lot of active managers (especially hedge fund managers) did very, very well, returns to the market factor were deeply negative. Meanwhile, returns to other factors were positive and strong. This was a dream setup for a hedge fund manager with the ability to aggressively short stocks. You had possibly the greatest relative value trade in modern financial history all teed up: short large cap growth (e.g. tech) and own small cap value.

This second chart shows passive and active fund flows:

Source: Morningstar

A cynical observer might infer that this is evidence of performance chasing — that investors are chasing market factor returns. Chasing market factor returns is in theory more appealing than almost any other permutation of performance chasing. In a world where you can own the entire US market for 5-10 bps you can more or less chase the market for free.

This is a critique of investor behavior, not any particular product. In the words of that ubiquitous (yet rarely heeded) swatch of disclosure: “past performance is not indicative of future results.”


This post is not intended as financial advice, or a recommendation to buy or sell any security. The information herein is insufficient for making an informed investment decision. Readers should consult with a financial advisor before buying any security. An advisor is able to make a recommendation taking the individual’s unique circumstances into account.

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