NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Size of the Active Management Industry

Lubos Pastor, Robert F. Stambaugh

NBER Working Paper No. 15646
Issued in January 2010
NBER Program(s):   AP

We argue that active management's popularity is not puzzling despite the industry's poor track record. Our explanation features decreasing returns to scale: As the industry's size increases, every manager's ability to outperform passive benchmarks declines. The poor track record occurred before the growth of indexing modestly reduced the share of active management to its current size. At this size, better performance is expected by investors who believe in decreasing returns to scale. Such beliefs persist because persistence in industry size causes learning about returns to scale to be slow. The industry should shrink only moderately if its underperformance continues.

download in pdf format
   (302 K)

email paper

This paper is available as PDF (302 K) or via email.

This paper was revised on July 25, 2012

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15646

Published: ĽuboÅ¡ Pástor & Robert F. Stambaugh, 2012. "On the Size of the Active Management Industry," Journal of Political Economy, University of Chicago Press, vol. 120(4), pages 740 - 781. citation courtesy of

Users who downloaded this paper also downloaded these:
Del Guercio and Reuter w17491 Mutual Fund Performance and the Incentive to Generate Alpha
Berk and Green w9275 Mutual Fund Flows and Performance in Rational Markets
Pastor, Stambaugh, and Taylor w19891 Scale and Skill in Active Management
Pastor and Veronesi w14646 Learning in Financial Markets
Temin w15645 The Great Recession and the Great Depression
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us