Former hedge fund manager Victor Haghani told CNBC that broad index funds may suit retail investors trying to beat the market through individual stocks or complex exchange-traded funds (ETFs), given professional firms' technology resources.
CNBC published the interview Saturday. Haghani is the founder and chief investment officer of Elm Wealth and a founding partner of hedge fund Long-Term Capital Management. CNBC reported that Elm Wealth prioritizes cost-effective investment strategies. Haghani said access to sophisticated products by itself does not solve the challenge of trying to outperform the market.
He said market participants continue to display extrapolation bias, the tendency to assume patterns in recent trading will continue. Haghani also questioned whether retail investors have become significantly more sophisticated over the past 30 years. In his view, investors remain susceptible to behavioral biases even as the range of products they can trade grows.
To describe the competitive landscape, Haghani pointed to Citadel, Jane Street and Hudson River Trading, which he said make money in markets rich with opportunities. He described such markets as "opportunity-rich" and said pursuing those openings favors firms able to spend $1 billion a year on technology. Individual investors trading from home, he added, may find a professional firm on the other side of a trade.
The interview also included Valerie Grimba, director of global ETF strategy at RBC Capital Markets. She said specialized funds can play a strategic role in retail portfolios. Grimba cited derivative-based products as a way to generate income and thematic ETFs holding 10 to 15 stocks as a way to invest across companies linked to a common subject. She said a basket can spare investors from trying to choose which company will eventually lead a theme.
"More choice is ultimately a good thing," Grimba said, while urging investors to understand a fund's holdings and the trade-offs of its strategy.
