On the Size of the Active Management Industry
48 Pages Posted: 20 Jan 2010
There are 4 versions of this paper
On the Size of the Active Management Industry
On the Size of the Active Management Industry
On the Size of the Active Management Industry
Date Written: January 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.
Keywords: active management, learning, returns to scale
JEL Classification: G11, G12, G20, G23
Suggested Citation: Suggested Citation
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