With passive investing now past 50% of US long-term assets, the question is whether price discovery itself is being distorted — a reframing of the debate, and where genuine, affordable alpha still lives.

“Index funds and ETFs are in the backseat of the car that active players are driving.” — Eric Balchunas, author of The Bogle Effect

In the world of investment strategies, a critical debate is gaining momentum, with implications far beyond academic discourse. It juxtaposes active versus passive investment methodologies and their influence on the financial markets, bringing to the forefront questions about market distortions, the precision of valuations, and the fundamental nature of market efficiency — putting conventional financial theory and practice to the test.

At the heart of the debate is the concern that passive investing, which now accounts for over 50% of US long-term assets, might be distorting market valuations, behaviour, and stability. Passive strategies — characterised by investment in funds that track market indices without attempting to outperform them — have surged over the past decade, propelled by the low-cost access to markets they provide.

Critics like Mike Green, an American portfolio manager, argue that such strategies could impair the market’s ability to allocate capital efficiently. Highlighting a “vicious cycle dynamic”, they point to a feedback loop in which passive inflows lift stock prices, leading to underperformance by value managers; as those managers are compelled to sell their underperforming stocks, the proceeds inadvertently flow back into passive strategies, lifting prices further and perpetuating the cycle. This challenges the Efficient Market Hypothesis’s assertion that prices integrate all available information.

The counterpoint is the vital role of active management. Active managers scrutinise market trends, company fundamentals, and broader economic indicators to make informed choices — buying undervalued stocks and selling overvalued ones. This process, proponents argue, is what drives prices toward fair value and keeps markets efficient.

At the intersection of this debate, Viquo began as a platform aiming to reconcile the strengths of both approaches. Echoing Vanguard’s role in providing affordable Beta, Viquo’s early mission was to deliver affordable Alpha — using digital technology to streamline the notably fragmented supply chain of the active asset-management industry, and to connect high-net-worth individuals (HNWIs) and family offices with actively managed, long-term funds. The focus was particularly on small and mid-sized funds that, despite their potential, frequently remain under the radar.

This shift is driven by technological innovation, a move towards transparent and affordable investment, and evolving financial theory. BlackRock, the world’s leading provider of passive funds, has itself embraced active management, publishing research that emphasises the growing importance of active strategies amid macroeconomic and market volatility. That study critiques static asset allocations, highlights the challenges of ending the ultra-low-rate era, and advocates the benefits of active strategies in capitalising on broader market dispersion — reinforcing the case for linking discerning investors with top active managers.

The debate marks a critical juncture in financial theory and practice. As the industry grapples with these challenges, the forward-thinking approach is a balanced integration of active management’s precision and passive strategies’ accessibility — one that addresses concerns about market distortion while paving the way for a more resilient, efficient, and equitable financial ecosystem.

Where this leads — This is where the Viquo thesis began. The evidence that the established databases systematically under-rate smaller active funds is set out in Viquo 100 (2024); the case for rotating toward that overlooked alpha before the cycle turns is Navigating the Inevitable (2024); and the argument’s mature form, two years on, is The Return of Judgement (2026).

Viquo Insights presents the editorial views of the author and the firm’s ongoing, exploratory thinking. It is provided for information and discussion only, and is not investment advice, nor an offer or solicitation to buy or sell any security or to adopt any investment strategy. You should do your own research, and we would always be very happy to know what you think, what you find, and how we can learn together.