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On the Size of the Active Management Industry

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  • Lubos Pastor

    (University of Chicago Booth School of Business)

  • Robert F. Stambaugh

    ()
    (The Wharton School of the University of Pennsyvlania)

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.

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Bibliographic Info

Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2010-001.

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Date of creation: 2010
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Handle: RePEc:bfi:wpaper:2010-001

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Web page: http://bfi.uchicago.edu/
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Related research

Keywords: active management; returns to scale; learning;

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References

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Citations

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Cited by:
  1. Lubos Pastor & Robert F. Stambaugh & Lucian A. Taylor, 2014. "Scale and Skill in Active Management," NBER Working Papers 19891, National Bureau of Economic Research, Inc.
  2. Diane Del Guercio & Jonathan Reuter & Paula A. Tkac, 2010. "Broker Incentives and Mutual Fund Market Segmentation," NBER Working Papers 16312, National Bureau of Economic Research, Inc.
  3. Glode, Vincent, 2011. "Why mutual funds "underperform"," Journal of Financial Economics, Elsevier, vol. 99(3), pages 546-559, March.
  4. Clemens Sialm & T. Mandy Tham, 2011. "Spillover Effects in Mutual Fund Companies," NBER Working Papers 17292, National Bureau of Economic Research, Inc.
  5. Wagner, Niklas & Winter, Elisabeth, 2013. "A new family of equity style indices and mutual fund performance: Do liquidity and idiosyncratic risk matter?," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 69-85.
  6. Robert F. Stambaugh, 2014. "Investment Noise and Trends," NBER Working Papers 20072, National Bureau of Economic Research, Inc.
  7. Diane Del Guercio & Jonathan Reuter, 2011. "Mutual Fund Performance and the Incentive to Generate Alpha," NBER Working Papers 17491, National Bureau of Economic Research, Inc.

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