I am intrigued by this new genre of financial writing that warns (in increasingly apocalyptic terms) that passive investing will lead to increasingly distorted and inefficient markets.

Nevsky Capital, a large hedge fund, noisily shut its doors last year with an investor letter that blamed, among other things, index investing that distorted correlations among stocks.

Sanford C. Bernstein & Co., LLC. recently published a note declaring that passive investing is “worse than Marxism” because at least Marxism allocates capital according to some kind of principle, whereas passive investing allocates capital by the happenstance of inclusion in an index.

And a research analyst recently posted “The Last Active Investor,” a short story that posits a dystopian future in which all market prices are set by a single person performing the world’s only fundamental research.

It’s true that index investing distorts stock prices to some degree, though there has been plenty of pushback to the claim that there’s any real danger of passive investing overtaking the market, especially since the definition of passive investing itself might be somewhat malleable in an age of increasingly sophisticated computerized trading.

But what I’m mostly curious about is what sorts of policy fixes defenders of active investment would recommend.  The Bernstein note is vague on this but apparently objects to government-sponsored initiatives that would favor passive investment of pension funds.  Meanwhile, Steve Johnson writing at the Financial Times proposes that passive investing actually be taxed to subsidize active investing.   And the author of the Last Active Investor does not say so explicitly, but he appears to favor some kind of loosening of insider trading restrictions – at least, that’s what I gather from the part of the story (spoiler alert!) where the Active Investor’s fundamental research is treated as market manipulation.

Of course, it’s somewhat ludicrous to suggest that workers should invest their retirement funds in a less profitable manner so that white collar business analysts can be subsidized in their important price setting work, and it seems to me that if passive investing is to be taxed to subsidize active investing, we probably want to make sure that active investors are keeping their costs down – which probably means some kind of vetting as well as salary and price controls, and … oh no, I think I maybe just endorsed the Marxism theory.