(MoneyWatch) We saw Tuesday that active fund managers’ latest excuse — that rising stock correlations meant they couldn’t beat the market — doesn’t hold up to the light of day any more than the other excuses offered. Today, I wanted to dive a little deeper into why active management doesn’t work.
The reasons active managers fail are simple:
The markets, while not perfectly efficient, are highly efficient in setting prices.
The vast majority of trading is done by institutional investors. Thus, it’s hard to imagine a large enough group of victims that are going to be exploited — for some managers to outperform others must underperform.
Their costs are much higher — what John Bogle called the “cost matters hypothesis.”