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Hedge funder Steve Cohen is officially on the index fund bandwagon

Steve Cohen at Point 72 Asset Management.
Adam Jeffery | CNBC
Steve Cohen at Point 72 Asset Management.

The rush toward index investing has gained an unlikely ally in prominent hedge funder Steve Cohen.

Cohen, the once high-flying Wall Streeter with S.A.C. Capital Management and now head of Point72 Asset Management, has taken a stake in a company that looks to steer young investors into index funds.

Point72 has invested $2 million in Acorns Grew, which has developed an app that pushes millennials into making small but regular contributions into index funds in an effort to get them thinking about their future, according to a Wall Street Journal report. A representative for Cohen verified the report to CNBC.

Cohen closed S.A.C. as part of a settlement with the the Securities and Exchange Commission over insider trading allegations. He opened Point72 as a family office that can't take outside money.

Acorns Grow has raised $35 million this year. The investment comes through Point72 Ventures, launched earlier this year in an effort to get millennials interested in smart investing. The idea is to push young investors to turn their focus from individual stocks and into diversified baskets of stocks through index funds.

While Point72 Ventures partner Pete Casella told the Journal that the move was "not an existential call on the future of passive investment," it comes at an interesting time in the intensifying debate between passive and active philosophies.

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Active management in general has underperformed basic indexes like the S&P 500 for most of the years since the financial crisis, but the trend has been especially pronounced this year. Just 18 percent of active managers are beating the large-cap Russell 1000 index, according to Bank of America Merrill Lynch, which said the level is the worst since it began tracking in 2003. That low performance level comes even as a majority of active managers have outperformed over the past four months.

Hedge funds practice active investing, using stock-picking and other strategies as a way to try to generate returns above the market. Passive investors use index funds that track large market benchmarks and sectors. The exchange-traded fund industry has been the prime beneficiary of the move toward passive investing, swelling to more than $3.3 trillion in assets globally, double their level since 2011, according to BlackRock.

Investors have been pulling money from actively managed funds at a rapid pace. Over the past year, active funds have seen $294.6 billion in outflows, while passive funds have taken in $453.7 billion, according to Morningstar.