“You all can’t beat the average because you are the average.” The financial market is a vast arena where participants buy and sell securities based on their beliefs and financial needs. While some investors prefer active management, which deviates from market weights, others opt for passive management, which mirrors the market weights. The concept of…

The short answer is no. One of the prime active manager’s pitches against passive investing is that they outperform in bear markets. The argument is that active managers can foresee downturns and position their portfolios accordingly, adding value through better selection into more defensive securities, compared to an index fund manager who must track the…

In this section and the following, we will explore how the growth in passive management will make the equity markets more efficient and decrease the variance of security pricing. However, we need to elaborate on a few key insights. First, what does it mean for markets to be efficient? Per Investopedia, “Market efficiency is the…

The common perception is that if one invests in ETFs or indices like the S&P 500, one is being “passive.” The media has additionally confused the definition by considering any rule-based or systematic strategy as passive investing. This poor understanding has led many investors astray, creating passive portfolios with poor diversification. Furthermore, it has introduced…

Participants in financial markets are engaging in a zero-sum game. Someone must underperform for any investor to generate excess returns over the market. Alpha works the same way; for every manager that has produced positive alpha, there must be someone that produced negative alpha. Yet, we know superstar managers who have made their clients rich.…

Active investing is an investment strategy in which investors trade based on preferences to outperform a given market. The market can be US stocks, international bonds, art, etc. In contrast, passive investing aims to match the market return. For example, to accurately match the return of the US stock market, a passive portfolio holds all…