Active versus Passive Management

Abstract

The choice between active and passive management is an important one, but often made on a foundation of false assumptions and flawed logic. A strong case can be made, at any time, for either. The basis for a sound choice is surprisingly simple. Ultimately, it hinges on views that 1) markets are efficient or inefficient, 2) some managers are able to identify inefficiencies in advance, or they are not, and 3) investors can identify the successful managers in advance, or they cannot. Recent past results are a very dangerous basis for this important choice. An array of questions and issues should be addressed in the choice between active and passive management, providing a roadmap for a sensible decision.