By Eric Hough on September 23, 2026September 23, 2026 By Eric Hough In 2008, Warren Buffett made his famous charitable wager against Ted Seides that hedge funds and active management would underperform Jack Bogle’s passive S&P 500 index. The ending is well known, the passive index won by roughly 500bps annualized. I still remember thinking in the early 2010s, what would happen if one day the market woke up, realized it had become one big passive bet, and everyone had the same large capital gain. One of the hardest things in life to do is implement change, even slight changes, especially when all is going smoothly. Whether it’s finding a new doctor, an earlier bedtime, a new job, or an investment shift, change is never easy. In 1985, fittingly during a cold war with Russia, our country’s hero at the time said, “If I can change, and you can change, everybody can change!” Rocky Balboa. Heck, even Vanguard is in the process of changing/adding to their business model. In 2005, 3% of the dollars invested in the US stock market capital was benchmarked to an index. Today we are at 16%. At what percentage of capital is too passive? 25%? 30%? I don’t know even if there is a percentage, but I begin with this because I think we’re living through the subtle change I once wondered about. Not a stampede out of indexing, but a quiet reallocation at the top of the wealth spectrum. Very similar to the article I wrote last month on the allocation of wealth being allocated to real estate due to new depreciation laws, it’s worth understanding the subtle change before we simply follow it. Active ETFs have gone from a niche experiment to one of the fastest-growing corners of asset management. Global assets have climbed past $2.5 trillion, up sharply from under $2 trillion a year earlier, and active strategies are capturing a share of new ETF dollars well out of proportion to their size in the market. Most new ETF launches this year have been active. Hedge funds have seen a parallel resurgence, with industry assets pushing past $5 trillion on the back of a record quarterly gain and net inflows over the last several quarters running at their strongest pace in nearly two decades. Surveys of the wealthy echo the shift, with far more investors and family offices planning to add to hedge fund allocations than to trim them. This is a real reversal from a decade ago when fee sensitivity and doubts about alpha were pushing that same group away. Part of this is structural, not sentimental. Active ETFs existed for years but stayed a niche until a 2019 regulatory change put active and passive ETFs on equal footing, clearing away the slow, case-by-case approval process that had kept active managers on the sidelines. Assets in the category have compounded at a remarkable rate ever since, and the surge in product launches, along with advisor comfort, follows directly from that shift. For high-net-worth clients specifically, three things drive this appetite. Cap-weighted indexes lean heavily on a handful of mega-cap names, and 2022 reminded everyone that stocks and bonds can fall together. Since many UNW clients often already carry concentrated exposure from a business or an employer, they need diversifiers that behave differently. Investors increasingly want to beat the market rather than just track it, and that appetite now extends into income generation and downside management through tools like derivative-income and defined-outcome ETFs, using options to smooth income or cap losses in exchange for capped upside. The wrapper has also matured, especially in fixed income, where active managers can add real value through how they source bonds and execute trades across credit, high-yield, and municipal markets, nuances a static index simply can’t capture. And after-tax outcomes matter enormously to this client base, the daily transparency and in-kind mechanics of ETFs let an active sleeve compete on an after-tax, after-fee basis in a way older active vehicles often couldn’t. In practice, I find it useful to give each active allocation a specific job rather than adding it because it’s in vogue. An efficiency sleeve uses active ETFs in less efficient corners, such as credit, small caps, emerging markets, municipals, where dispersion is wide enough for skill to matter. A diversifier sleeve uses hedge funds for low-beta and differentiated return streams, sized against a risk budget rather than a headline percentage with a clear answer to what it’s replacing. The third role would cover liquidity (illiquidity), income and risk management, where other alternatives or buffer/derivative-income ETFs can serve clients who are looking to fill a specific criterion. The diligence doesn’t change just because the wrapper is new. Separate alpha from beta before paying a performance fee. Check active share, tracking error, and whether the excess return clears the fee drag over a full cycle. Insist on team stability, a repeatable process, and enough underlying liquidity, particularly in credit. Understand exactly what a strategy does, its buffer, its yield source, its true exposure, before it ever goes into a client account. Once in the portfolio, log the objective for entering the investment including its role, specific criteria you are looking to achieve, its review horizon, and the evidence that would get it removed. Sixteen years after the Buffett-Seide’s bet was settled, the pendulum hasn’t reversed so much as widened. The strongest portfolios will keep using passive for cheap, efficient beta, along with active ETFs and alternatives investments, for specific, clearly stated investment sleeves. If we can’t say what job a manager is hired to do, and what would get them fired, the strategy isn’t ready for the client. That’s the subtle change worth making. Eric Hough | Director, Asset Management Eric Hough joins Great Valley Advisors as Director of Asset Management, specializing in Alternative Investments. In this role, he will oversee portfolio strategy, manage fund investments, and build lasting investor relationships. With extensive Wall Street experience and deep expertise in alternative assets, Eric is well-positioned to deliver meaningful value to clients while advancing the firm’s long-term growth initiatives.a, and CFA Magazine. Disclosure: I/we have no stock, option, or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice. LPL Compliance Tracking #1180438 The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including loss of principal. No strategy assures success or protects against loss.