Passive management (often referred to as indexing) is an investment strategy that does not rely on active risk. Instead, it tries to copy a market index such as the S&P 500 or the Dow Jones Industrial Average (DJIA).
What is Passive Management in Crypto?
The idea behind passive management, a type of investment strategy, is that people are unlikely to consistently outperform the market, so they have to passively “move with it.” This idea resonates with the efficient market hypothesis (EMH), which implies that current market prices already reflect all available information and that people cannot beat the market in the long run.
Thus, unlike active portfolio management, passive investing is not dependent on subjective human decisions because there are no attempts to profit from market inefficiencies. Therefore, passive management is not based on a specific group of assets. Instead, the fund manager tries to track a market index.
The main advantages of passive portfolio management relate to lower fees and operational costs, as well as reduced risks. Typically, a passive investment strategy will create a long-term portfolio that tracks the performance of a stock market index. Mutual funds that employ such a strategy are often associated with mutual funds and exchange-traded funds (ETFs).
Therefore, the success rate of such an approach depends on the much broader market performance represented by a particular index. Essentially, this means that the strategy in question does not involve human error in the selection of assets.
Historically, passive portfolio management strategies have outperformed active investing, mainly because of their lower fees. In recent years, especially after the 2008 financial crisis, there has been a growing interest in passive investing.
