Passive to Active

because passive investing can be replaced by an algorithm written by a ten year old?

so you'd rather have PMs spinning wheels producing worse returns just for a safe job? last i heard vanguard employs people, not pure algorithms.

Ignoring the fact that this troll post will probably cite famed academic papers purporting EMH and passive strategies doing better than investment managers, and writing off Buffett, Soros, Renaissance Technologies, and other brilliant investor/arbitrageur as 'lucky'/taking on exotic hedge fund beta:

Passive managers generally charge lower fees since their strategy is absolutely vanilla. At that point they are basically relying on sheer AUM to generate revenue, and there is no perceived skill.

Not all active shops are 6 a.m. to 9 p.m. at the analyst level either.

The reason why active shops are more prestigious is that they like to think they generate returns due to skill, instead of index replication. Whether or not they do so is a matter of philosophical debate, but there are star managers in this industry that consistently generate alpha via a combination of genius and sheer luck. Consistent alpha generation means higher fees, and more money.

Alpha over the long term does not exist. AM folks are there to tailor their clients' holdings to the appropriate risk and return appetite, time horizon, tax situation, legal situation, and liquidity needs. They do create value, but not in the superior risk-adjusted returns sense.

For every Buffett out there, there are probably 1,000 managers who crashed and burned.

I notice a theme that people rank active funds higher in terms of prestige rather than passive funds. Why is that? Why bust your balls coming in at 6 AM, leaving at 9 PM, when you can follow the index, go golfing during the day, and still have 4% better returns year on year?

What mythical role is this that exists at passive funds that involves no work and high pay? You understand that passive funds have no analysts in a traditional sense right? Assuming they are trying to match a benchmark, passive funds at most have a few quantitative people that basically create algorithms to try to match the index as closely as possible. These are not exactly high paid or exciting positions.

While this horse seems to have been sufficiently beaten to death, to add one more nail to the coffin, passive management involves guaranteeing a small amount of underperformance per year whereas every active style involves deviating from whatever the benchmark is in an attempt to generate returns that can produce some larger amount even while covering trading expenses, salaries, bonus, etc.

While the overall average investor (i.e. everyone from Blackrock down to the day trader) will underperform the market because it is nothing more than the total return return of the relevant index, minus expenses, this doesn't mean that there aren't investment managers who can consistently beat the market over a long time period (e.g. Buffett, Schloss, Dalio, etc). The goal of entering this business is people want to get to the point where they are one of those investment managers who can consistently beat the market. This isn't to say that it's easy, and ultimately, most people end up not being all that good at it, but this is no different than any other business out there (i.e. just because most people can't become wildly successful in making widgets does not mean the entire widget making industry adds no value).

Also, a much longer conversation can be had over (1) the fact that passive investors benefit from the active investors who are involved in price discovery as they spend no effort researching companies but get to ride on the coat tails of active investors and (2) that passive investing will artificially lower the cost of equity for companies included in the index (i.e. won't sell out even if the fundamentals are horrible). But this is a far more complex discussion that could fill several PhD theses.

Lastly, a good defense of the industry (by an admittedly biased party) can be found here: http://www.pzena.com/Cache/1500075841.PDF?O=PDF&T=&Y=&D=&FID=1500075841…. This isn't to say you should take it at face value, but that you should read the arguments and see what specific things you disagree with before you outright label the entire active investment management industry as one that does not add sufficient value to justify its cost.