The end of passive? Index investing is risk disguised in safety, says global fintech founder Mukul Pal

Mukul Pal, founder of AlphaBlock, has spent over two decades building quantitative investment strategies for active managers worldwide. Starting at the Bombay Stock Exchange and later advising asset managers in Europe, he combined deep expertise in finance and statistics with global experience to challenge conventional investing frameworks. His innovations, recognized by MIT and Nasdaq, are now used by global mutual fund companies.

Since its December 2023 launch, one of his partner funds, a global ex-US fund has delivered 54.57%, placing the fund in the top percentile end of 2024 and scaling to CAD 110 million in AUM from its initial CAD 8 million AUM. In India too, its research has driven 8.63% excess returns over the BSE 100 since March 2023.

Pal believes the firm’s probabilistic approach marks a fundamental reset for active investing—and is on a mission to prove that passive’s dominance can be broken.

Edited excerpts from an exclusive interview with N Mahalakshmi:

Your book title is very provocative – End of Passive Investing. Tell us the problems with passives.

Passive investing has become the world’s dominant strategy, with nearly 40% of all global equities—around $50 trillion—parked in market-capitalization–weighted index funds. On the surface, it looks like safety and diversification. But under the hood, m-cap weighting systematically rewards size and momentum. The bigger a stock becomes, the more money flows into it, regardless of merit. This creates a “rich-get-richer” bias that turns indexes into herding mechanisms rather than fair reflections of the market.

The result is extreme concentration: the top 10 companies in the S&P 500 control over 35% of its weight, the highest in history. Trillions are effectively tied to a few names, amplifying bubbles, distorting price discovery, and embedding systemic fragility. What is sold as diversification is actually risk disguised as safety.

Why has the world lived with this if the problems are real?

Because passive investing is convenient and cheap. Active managers have been trapped competing against biased benchmarks that are almost impossible to beat. Over 90% underperform over 10–15 years, according to SPIVA, and fee drag makes it worse. Why pay 2% for underperformance when you can pay 0.05% for the index? That twenty-fold fee gap compounded into trillions shifted the world to passive.

Beyond economics, myths are hardened into ideology. For decades, the mantra “you can’t beat the market” was repeated by regulators, academics, and even Nobel Prize–winners, until it became accepted as truth. Investors internalized it, and inertia did the rest.

What does an alternate alpha-generating solution look like?

Most traditional strategies fail because they’re built on static variables—P/E ratios, book-to-market, momentum, factors. Once a variable is widely known, it gets arbitraged away. Campbell’s and Goodhart’s laws are clear: when a measure becomes a target, it stops working. That’s why once-popular factors like value or small-cap have collapsed.

The solution AlphaBlock offers is that, instead of blindly rewarding size, we use probabilistic frameworks that continuously rebalance statistical biases. Every stock—not just the mega-caps—gets a fair chance to enter and exit the portfolio. By using dynamic relative scoring across persistence and reversion forces, our systems restore diversification and fairness across stocks. In effect, AlphaBlock reverses the hidden “winner’s bias” of MCAP indexes, offering investors a way out of the illusion of safety and into genuine resilience.

More significantly, central to AlphaBlock’s superiority is treating probability as the variable. Unlike factors, probability is dynamic, amorphous, and inexhaustible. We built a dynamic relative scoring system that calculates probabilities across all stocks, all the time, incorporating multiple statistical biases. Instead of a basket that rewards size (MCAP) or a static.

In a non-index world, how do you assess or set benchmarks?

I don’t believe in a “no-index” world; I believe in a multi-index world. The S&P 500 is increasingly fragile—five stocks drove more than 50% of its 2023 returns. That’s not diversification; it’s dependence.

Clive Granger (Nobel, 2003) offered the real challenge: the only way to bury the Efficient Market Hypothesis is to create open methodologies that consistently generate alpha. That means more indexes, not fewer—statistical indexes that outperform MCAP indexes over long horizons.

Again, this is exactly what AlphaBlock has built: probabilistic indexing frameworks that consistently beat MCAP benchmarks by understanding and neutralizing their biases. Investors don’t need to give up benchmarks—they need better ones. By replacing the monopoly of MCAP with a family of statistical indexes, we create benchmarks that are fair, resilient, and alpha-generating.

Investing outcomes depend on the future. Then, why do you think quant models, based on the past, can help do better?

Yes, investing is fundamentally about anticipating the future. Even a small predictive edge compounds into transformative wealth. For example, just 3.5% alpha compounded over 20 years nearly doubles wealth compared to passive.

But quant models in their current form have failed. For a century, they never questioned the definition of “market.” They assumed MCAP indexes were neutral, when in fact they were biased. That blind spot means quant alpha has been chasing its tail for decades.

Our solution to this is quite simple—we go back to first principles of statistics. We build models not on assumptions about efficient markets, but on the physics of persistence, reversion, and probability. Our machines measure biases directly and turn them into investable systems. This creates a genuine edge—one overlooked by traditional quants who never challenged the benchmark itself.

In short, quants failed because they didn’t question the ground they were standing on. AlphaBlock does. That’s why we believe we’re in the Golden Age of Alpha—because the blind spot is finally visible.

How do you see the future of investing changing?

Machines already run execution. Soon, they’ll run portfolio construction too. Over long horizons, it will be impossible for discretionary humans to compete. The “thrill” of investing will vanish, replaced by quiet efficiency.

At AlphaBlock, we’re building the robo-asset manager of the future. Our vision is simple: 3,000+ digital portfolios, each benchmarked and designed to outperform its index, delivered globally through automation. Investors will choose their market, choose their benchmark, and then pay only if we deliver alpha.

This is a bigger shift than one can imagine. But the industry evolves step by step. Floor traders gave way to screens, brokers to bots, discretionary managers to indexes. The last bastion is passive itself—and that’s what we are dismantling. The future is clear: investing will be machine-led, hyper-personalized, and performance-aligned.

Explain the portfolio management solutions AlphaBlock offers.

We offer three kinds of solutions. First, Mutual Fund Repurposing. We take underperforming funds and redesign them using our process. Adding alpha systematically lifts them from their bottom quartile or low ranking to potentially the top percentile in their category. This extends fund life, attracts assets, and delivers better outcomes for clients. While we also help build new funds—as we have in Europe—repurposing is often the easiest way for asset managers to work with us. Everyone wants validation before a stronger relationship.

Second, Pay-for-Alpha Portfolios. These are digital, benchmark-linked alternatives to index funds. Investors choose the benchmark they want to beat, and after a year, they pay only if we deliver alpha. This is an industry-first fee model that perfectly aligns incentives. It underpins our global robo-asset management business, already live in Europe and India and set to scale to Boston, Zurich, and London with more than 3,000 digital portfolios. These portfolios combine automation, probabilistic science, and low turnover (under 10%) to deliver alpha at scale. Our focus is simple: to give passive a run for its money and restore fairness to global markets.

Third, Long-Short Funds. These are perpetual, multi-strategy funds that go long our version of the market index and short the benchmark ETF. After more than a decade of research, we are now testing them in North America with plans to launch in 2026.

Tell me more about your Long Short framework. Wouldn’t you agree that Long Short strategies can sustainably outperform the benchmark only if gross exposures can be run beyond 100%.

Long-short strategies allow us to isolate alpha while limiting risk—a challenge traditional managers rarely solve because they remain focused on stock selection rather than index construction. Our approach is to run perpetual multi-strategy funds that go long our probabilistic version of an index and short the benchmark itself—for example, buying our weighted version of the Nifty 50 while shorting the Nifty ETF.

We believe long-short will become our flagship offering because it delivers what investors value most: genuine, isolated alpha, independent of market direction. Once you can prove an alpha-generating system under those conditions, you set a new industry standard.

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