‘Incredible Shrinking Alpha’ Continues

Even though Wall Street tries to keep alive the debate about the merits of active versus passive investing, a clear trend has emerged over the last several decades in which investors are slowly but steadily abandoning the hope of outperformance that active management offers in favor of the certainty of earning market (not average) returns that passive management provides.

The trend has been inexorable as investors become more and more aware of the low and declining odds that active management will outperform. For example, the evidence presented in my book, “The Incredible Shrinking Alpha,” which I co-authored with Andrew Berkin, shows that while 20 years ago roughly 20% of active managers were generating statistically significant alpha, today that figure is down to about 2%. And that’s even before considering the impact of taxes on taxable investors.

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