Active and Passive Investing
What Are Good/Bad Contexts for Active Managers?
Look for dusty corners and patsies
Dusty corners of financial markets are often thought to be less efficiently priced
Such dusty corners are characterized by few active managers and few fundamental analysts
Candidates include Small/micro-caps, Emerging/frontier markets
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Counterargument: These dusty corners have higher fees, and they too have active losers. Fam a has
argued that the Sharpe's arithmetic applies in every corner*
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Since every investor cannot pick a top-quartile manager, active managers' aggregate net performance could actually be worse in such
high-fee contexts
Beyond dusty corners, it may be worth seeking markets with a large pool of likely negative-alpha players
Poker analogy: You'd rather play with patsies than with sharks
Thus look for markets with many unsophisticated investors and/or non-economically motivated participants
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(AOR
* Fama-French Forum "Why Active Investing is a Negative Sum Game" (2009)
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