Ex-OdeyPortfolio, ManagerCautions Investors About 'Buying Blind' in Uncertain Market

James Hanbury, a former Odey Asset Management portfolio manager, warns investors about the risks of passive investing in his letter to Lancaster Absolute Return Fund investors. Hanbury's fund returned 2.9% in March 2024 and 1.4% for the year, despite challenges in the current market environment.

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Mahnoor Jehangir
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Ex-OdeyPortfolio, ManagerCautions Investors About 'Buying Blind' in Uncertain Market

Ex-OdeyPortfolio, ManagerCautions Investors About 'Buying Blind' in Uncertain Market

James Hanbury, a former portfolio manager at Odey Asset Management (OAM), is sounding the alarm about the risks investors face in the current market environment. In a letter to investors of his new Lancaster Absolute Return Fund, Hanbury warns that the growing dominance of passive and systematic trading strategies is making it difficult for fundamental investors to effectively traverse the market.

Why this matters: The rise of passive investing has significant implications for the overall health of the market, as it can lead to inefficiencies and distortions in price discovery. As more investors opt for passive funds, it may become increasingly challenging for active managers to outperform, potentially affecting the stability of the financial system.

Hanbury expresses concern about the increasing influence of passive investing on stock prices. He believes company fundamentals are becoming less relevant as systematic and passive strategies drive market movements. "Investors operating outside these big trading programs and trading on a company's outlook were essentially buying blind," Hanbury states in his letter.

The Lancaster Absolute Return Fund, which Hanbury now runs with ex-Odey colleague Jamie Grimston, oversees approximately $813 million in investments. The fund returned 2.9% in March 2024 and 1.4% for the year ending March 31, 2024. Despite the positive performance, Hanbury emphasizes the challenges investors face in the current market environment, attributing increased volatility to the growth of passive investing.

While Hanbury's fund benefited from long positions in large banks such as Barclays, NatWest, and Deutsche Bank, its performance was hindered by short positions onprivate equity. The mixed results highlight the difficulties investors encounter in coping with today's market environment, where traditional fundamentals-based strategies may not always yield expected outcomes.

In his letter, Hanbury draws attention to the potential risks associated with the growing popularity of passive investing. He warns,"Most investors buying a passive fund have no idea they are on a momentum trade and clearly they are adding to the weight of money that does not understand what itowns. "This statement highlights the concern that many investors may be unaware of the underlying dynamics driving their investments."

The rise of passive investing has been a significant trend in recent years, with investors increasingly opting for low-cost, index-tracking funds. While these strategies have gained popularity because of their simplicity and lower fees, critics argue they can contribute to market inefficiencies and distortions. As more money flows into passive funds, questions arise about the impact on price discovery and the ability ofactive managersto outperform.

Hanbury's perspective sheds light on the challenges faced by active managers in the current market environment. While passive investing has its merits, investors must recognize the potential drawbacks and consider the role of fundamentals-based strategies in their investment decisions. Investors need to remain vigilant, adaptable, and well-informed to confront uncertainties and seize opportunities that arise in 2024 and beyond.

Key Takeaways

  • James Hanbury warns that passive investing dominance hinders fundamental investors' market navigation.
  • Passive investing can lead to market inefficiencies and distortions in price discovery.
  • Hanbury's fund faces challenges in the current market, despite positive performance.
  • Many investors may be unaware of the underlying dynamics driving their passive investments.
  • Active managers face difficulties outperforming in a market dominated by passive strategies.