Remeasuring Scale in Active Management

Abstract

We argue that 65% more total assets should be included in the scale measure of actively managed portfolios. By leveraging two major datasets of institutional products, we identify trillions of institutional assets that are co-managed with their "twin" mutual funds with average return correlations of 99.9%. By including these institutional assets, fund-level (industry-level) diminishing returns to scale of active investments is reduced by up to 90% (70%), and the dollar value added of active strategies is more substantial and persistent than previously suggested. Besides skewing crucial estimates in active asset management, the measurement issues extend to flow metrics and passive investments.