BOGLE: Hedge funds and mutual funds are full of excuses

Mutual funds and hedge funds are full of excuses, according to the man who revolutionized investing for Main Street.

John C. Bogle created Vanguard, which in 1976 launched the first index fund - a fund that passively tracks the stock market.

Passive investing took some time to catch on, but in recent decades index funds like Vanguard's have eaten up the assets of active managers like mutual funds and hedge funds, which try with their own analysis to beat the markets.

Active managers face a big business problem with the indexing trend. Active management fees are much higher than index funds', and at the same time many active managers aren't outperforming their index benchmarks - leading investors to question why they should pay money for underperformance.

Meanwhile, lots of criticism has been leveled at index funds - from allegedly creating anti-trust concerns to distorting markets - but Bogle won't have any of it.

In an extensive interview with Business Insider, Bogle laid out his counterattack against those that criticize passive investing. Here's an excerpt from our chat (emphasis added):

Levy: Another criticism I hear is that index funds are somehow distorting the market. How would you respond to that?

Bogle: You just look at the math. I won't get into the damn trading in ETFs, trading from one bank to another. I don't see how that distorts the market because it's bankers trading with bankers.

As for the traditional index funds like ours, we'd probably account for - let me guess - less than 1% of the volume trading on the New York Stock Exchange. We just go in and buy the darn stock and hold it forever. And if we get more money in, we buy some more, and if we have money going out, which is pretty rare these days, we sell some. It's not a big part of the marketplace.

People are just throwing up a whole lot of straw men in the hope that they can find some piece of mud that will stick. That's probably what I'd do if I were in their position.

These active managers have a real business problem. They are losing money. Vanguard accounts for over 100% of the cash flow in the industry. One firm. All the other firms in the industry together are losing money, losing cash flow. Of course they don't like it. I understand that. But it was never my design to build a colossus.

To read the full Business Insider interview with Bogle, head over here.