Is Active Investing Doomed as a Negative Sum Game? A Critical Review

15 Pages Posted: 23 Aug 2019 Last revised: 4 Sep 2019

See all articles by Geoff Warren

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Date Written: September 1, 2019

Abstract

Against a background of passive investing in the ascendancy, I delve into the issue of whether active fund managers can add value through the prism of Sharpe’s proposition that active investing is a zero sum game prior costs and negative sum game after costs. I explain some of the gaps in Sharpe’s proposition that leave room for active managers to outperform. I make the point that research on the performance of active funds does not directly test Sharpe’s proposition, and if anything seems inconsistent with it acting as a constraint on the ability of active managers to create value. I argue that the circumstances of the investor and the nature of the market are more important considerations for the choice between active and passive management, with notable differentiators including the fee paid, investor objectives and the asset category being considered. The main message is that ‘it depends’.

Keywords: fund management, active versus passive, zero-sum game

JEL Classification: G11, G23

Suggested Citation

Warren, Geoffrey J., Is Active Investing Doomed as a Negative Sum Game? A Critical Review (September 1, 2019). Available at SSRN: https://ssrn.com/abstract=3441036 or http://dx.doi.org/10.2139/ssrn.3441036

Geoffrey J. Warren (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

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