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Matthias Knab, Opalesque for New Managers: In a new paper, New York based Old Farm Partners has made the case for a fundamental shift in the investment landscape, arguing that the era of passive dominance may be giving way to a more fertile environment for active managers.
In the aftermath of the 2008 financial crisis, a decade of near-zero interest rates and quantitative easing created an unprecedented "rising tide" environment that lifted virtually all stocks, making passive investment vehicles like ETFs the dominant strategy. However, according to Kieran Cavanna, Chief Investment Officer at Old Farm Partners (OFP), the investment landscape has fundamentally shifted.
"The 2020s kicked off with a series of macro shocks that have completely transformed the playing field," explains Cavanna. "The combination of the Covid-19 pandemic, generational inflation, and the Fed's aggressive rate hikes has created a market environment where company-specific factors matter more than ever."
The numbers support this thesis. Single stock dispersion within the S&P 500 Index reached 33% earlier in 2024, significantly above historical averages. Similarly, the return difference between top and bottom performers in the MSCI ACWI Index has increased by approximately 20% in the post-Covid era compared to 2010-2019.
Madeline Endres, Managing Director of Research at OFP, sees this increased dispersion as a game-changer for fundamental stock pickers. "According to Morgan Stanley Prime Brokerage data, the spread between long and short equity positions hit record highs in 2024. This statistic underscores the rich opportunity set that active managers have in front of them."
Old Farm Partners is positioning itself to capitalize on this shift through a differentiated approach to hedge fund portfolio management. The firm focuses on small and mid-cap opportunities in both U.S. and European markets, areas they believe offer the greatest potential for active managers to generate alpha. Their strategy emphasizes thematic investments in sectors poised for structural growth, including U.S. re-industrialization and power grid infrastructure.
Old Farm also follows a hybrid approach to fees and accessibility. By combining traditional hedge fund investments with co-investment opportunities, they've created a structure that delivers institutional-quality active management with lower overall fees. Their portfolio, as of October 2024, achieves a blended management fee of 1.01% and performance fee of 15.05%, significantly below industry standards.
"We believe the next decade will look very different from the last," concludes Cavanna. "The conditions that made passive investing so successful - ultra-low rates and minimal dispersion - are unlikely to return. Investors need to adapt their portfolios accordingly."
For institutions looking to navigate this new landscape, Old Farm Partners' approach offers an interesting case study in how to blend active management expertise with investor-friendly terms. As markets continue their trajectory, their thesis about the return of stock picking may prove prescient.
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