Active Asset Managers Face Asymmetric Risks from Paradigm Shift

Active asset managers face asymmetric risks from a paradigm shift in monetary policy regimes and inflation trends, as some active funds increased risk-taking to compete with passive funds - the primary beneficiaries of prolonged low volatility. A decade of volatility and term premium suppression also led some active funds to adapt a bearish volatility stance and increased their vulnerabilities to a regime change in inflation dynamics, as they transfer risks from debt issuers onto their balance sheets. A growing body of research now point to cumulative policy costs from prolonged unconventional monetary easing, and aversion to mounting policy costs and retreat from globalization would heighten volatility and financial instability. Likelihood of regulatory scrutiny would rise if non-bank financial institutions' complacency on volatility contribute to financial stability, and "Volcker-like" rules imposed on non-bank asset managers would lead to crippling impacts on fund operations. Thus, active portfolio managers adept at managing volatility can minimize regulatory scrutiny by counterbalancing systemic risks from passive strategies.