Key Takeaways
- • Victor Haghani, founder and CIO of Elm Wealth and a founding partner of Long-Term Capital Management, says retail investors are not meaningfully more sophisticated than they were 30 years ago, citing persistent behavioral biases such as extrapolation bias.
- • Haghani argues that individual investors trying to beat the market through single stocks and complex ETFs are likely better served by broad market index funds.
- • Haghani contends that retail traders competing against firms such as Citadel, Jane Street and Hudson River Trading face a structurally unfavorable environment, noting that the counterparty to a retail trade is often a professional such as Citadel CEO Ken Griffin.
- • RBC Capital Markets' Valerie Grimba, director of global ETF strategy, says concentrated funds holding 10 to 15 stocks and derivative-based income products can serve strategic roles, provided investors understand the holdings and trade-offs.
Summary
Victor Haghani, founder and chief investment officer of Elm Wealth and a founding partner of hedge fund Long-Term Capital Management, told CNBC's "ETF Edge" that retail investors are not much more sophisticated than they were 30 years ago. He said investors remain subject to behavioral biases, particularly extrapolation bias, in which recent performance is assumed to persist. Elm Wealth emphasizes cost-effective investment strategies, and Haghani said it is increasingly difficult for individual non-professionals to generate alpha. He argued that retail investors are "very well served" by broad index fund exposure.
Haghani also cautioned against assuming that access to sophisticated strategies confers an edge. Referring to Citadel, Jane Street and Hudson River Trading, he said these firms are "minting money every single day" through technology investments that individual investors cannot match. He added that a retail investor trading from home is likely facing Citadel CEO Ken Griffin or a comparable counterparty, and that such trades "probably [are] not going to end all that well."
RBC Capital Markets' Valerie Grimba, director of global ETF strategy, offered a more favorable view of specialized products in the same interview. She said "more choice is ultimately a good thing" and noted that funds holding 10 to 15 stocks allow investors to access specific investment themes without needing to identify the eventual largest winner. She also said derivative-based products can generate income in various ways.
Grimba cautioned that investors must understand the holdings and trade-offs of any strategy they select. "It's more important than ever for an individual investor to understand what they're buying," she said, adding that investors should be able to explain what an ETF holds and why they own it.
Haghani also cautioned against assuming that access to sophisticated strategies confers an edge. Referring to Citadel, Jane Street and Hudson River Trading, he said these firms are "minting money every single day" through technology investments that individual investors cannot match. He added that a retail investor trading from home is likely facing Citadel CEO Ken Griffin or a comparable counterparty, and that such trades "probably [are] not going to end all that well."
RBC Capital Markets' Valerie Grimba, director of global ETF strategy, offered a more favorable view of specialized products in the same interview. She said "more choice is ultimately a good thing" and noted that funds holding 10 to 15 stocks allow investors to access specific investment themes without needing to identify the eventual largest winner. She also said derivative-based products can generate income in various ways.
Grimba cautioned that investors must understand the holdings and trade-offs of any strategy they select. "It's more important than ever for an individual investor to understand what they're buying," she said, adding that investors should be able to explain what an ETF holds and why they own it.
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