An ongoing debate in finance is whether “active” investment strategies can outperform “passive” strategies. The empirical evidence in favor of passive strategies which appears in studies published by peer-reviewed scientific journals is overwhelming. For example, in studies of mutual fund performance, passive strategies almost always blow away active strategies. Similarly, the empirical evidence on frequency of trading by “retail” customers is that on average, portfolio performance is inversely related to trading frequency; i.e., the more people trade, the worse they do. Even hedge funds chronically underperform passive investment strategies. For example, the authors of a 2011 Journal of Financial Economics (JFE) article entitled “Higher risk, lower returns: What hedge fund investors really earn” find that hedge fund returns are on the magnitude of 3% to 7% lower than corresponding buy-and-hold fund returns, reliably lower than the return on the Standard & Poor’s (S&P) 500 index, and only marginally higher than the riskless rate of interest.
Notwithstanding the growing popularity of critiques of the efficient market hypothesis (e.g., see “The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street” by Justin Fox), the growing body of scientific evidence which corroborates efficient market theory is very impressive indeed!