Retail investors are not more sophisticated than 30 years ago, says former hedge fund manager

Retail investors who are trying to beat the market by buying individual stocks and complex exchange-traded funds may be better off with broad market index funds, according to Elm Wealth's Victor Haghani.

"I'm not sure that investors are that much more sophisticated than they were 30 years ago," the firm's founder and chief investment officer told CNBC's "ETF Edge" this week. "We still are human beings and we're subject to certain kinds of biases — particularly extrapolation bias where whatever has happened recently in the past we tend to believe that it's going to continue into the future."

Haghani, who was a founding partner at hedge fund Long-Term Capital Management, emphasizes cost-effective investment strategies as a priority at his current firm.

"It's an environment that continues to be tough for individual non-professionals to generate alpha," he said. "[Retail investors are] just very well served by having some exposure to broader index funds overall."

According to Haghani, access to elaborate strategies doesn't necessarily provide advantages.

"Whether it's Citadel or Jane Street or Hudson River Trading, they're just minting money every single day. So, it's an opportunity-rich environment — if you happen to have a billion dollars to spend on tech each year," he said. "If you're a retail investor sitting at home and trying to find opportunities, you have to realize that probably on the other side of your trades is [Citadel CEO] Ken Griffin or whoever, and it's probably not going to end all that well."

'More choice is ultimately a good thing'

However, RBC Capital Markets' Valerie Grimba sees sophisticated funds playing a strategic role in retail investors' portfolios.

"More choice is ultimately a good thing," the firm's director of global ETF strategy said in the same interview.

She said funds holding 10 to 15 stocks can help investors participate in specific investment themes without having to identify their eventual biggest winner, while derivative-based products can be used to generate income in various ways.

But Grimba also emphasized that investors need to understand the holdings and trade-offs of the strategies they choose.

"It's more important than ever for an individual investor to understand what they're buying," she said. "You should be able to explain to your friend what it is in the ETF and what you're buying."