Seth A. Klarman
Last quote by Seth A. Klarman
Seth A. Klarman quotes
One of the perverse effects of increased indexing and E.T.F. activity is that it will tend to 'lock in' today's relative valuations between securities.
With any asset class, when substantial new money flows in, the returns go down. No surprise, then, that as money poured into hedge funds, overall returns have soured.
When money flows into an index fund or index-related E.T.F., the manager generally buys into the securities in an index in proportion to their current market capitalization (often to the capitalization of only their public float, which interestingly adds a layer of distortion, disfavoring companies with large insider, strategic, or state ownership). Thus today's high-multiple companies are likely to also be tomorrow's, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings.