On the Size of the Active Management Industry

47 Pages Posted: 13 Jan 2010 Last revised: 13 Dec 2011

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: January 5, 2010

Abstract

We analyze the equilibrium size of the active management industry and the role of historical data - how investors use it to decide how much to invest in the industry, and how researchers use it to judge whether the industry’s size is reasonable. As the industry’s size increases, every manager’s ability to outperform passive benchmarks declines, to an unknown degree. We find that researchers need not be puzzled by the industry’s substantial size despite the industry’s negative track record. We also find investors face endogeneity that limits their learning about returns to scale and allows prolonged departures of the industry’s size from its optimal level.

Suggested Citation

Pastor, Lubos and Stambaugh, Robert F., On the Size of the Active Management Industry (January 5, 2010). MFI Working Paper No. 2010-001. Available at SSRN: https://ssrn.com/abstract=1535518 or http://dx.doi.org/10.2139/ssrn.1535518

Lubos Pastor (Contact Author)

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
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United States
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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United States

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