Evidence that active management does not work – from Active Management in Mostly Efficient Markets (Robert C. Jones, CFA, and Russ Wermers)
The study shows that neither the average mutual fund nor the average institutional separate account (ISA) earned a positive alpha, net of fees and expenses, after adjusting for market and style risks. It is even harder for actively managed funds to outperform passive alternatives on an after-tax basis.
The study found that the average active manager earns a positive alpha before fees but that this alpha does not quite cover the costs of active management.
Most important findings in that study:
Active returns (adjusted for risk) across managers and time probably average close to zero, net of fees and other expenses. This finding is what we should expect in a mostly efficient market.
In another study (Does Active Management Pay? New International Evidence)
Quote: “The authors examine the empirical evidence for the common academic guidance that even sophisticated investors should avoid active equity management because of the outperformance of passive strategies after costs. They confirm this advice’s validity for the US equity market, the world’s most efficient market, but identify exceptions elsewhere.”
Active management might work in inefficient markets. But in efficient markets, active management does not work net of fees.