archived_user
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- Jun 18, 2026
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I’m going through the LVL3 reading 8 which explains behavioral finance etc. I happened to read these paragraphs:
“Barras, Scaillet, and Wermers evaluate the skill of active managers. Their study was intended to make general statements about the mutual fund industry rather than about any single mutual fund. They evaluate performance over the full set of mutual funds and separate them into three categories—skilled (generating positive alpha), unskilled (generating negative alpha), and zero-alpha. They add to previous research by explicitly accounting for skill and luck. Earlier empirical work either assumes no luck or full luck, thus producing biased conclusions about the prevalence of truly skilled and truly unskilled fund managers. Barras et al. conclude that 75.4 percent of the 2,076 funds analyzed were zero-alpha funds over their lifetimes. Of the remainder, only 0.6 percent were skilled and 24.0 percent were unskilled. In sum, Barras et al. conclude that the majority of actively managed domestic equity mutual funds have generated at most zero alpha after adjusting for luck, trading costs, and fees.”
and then
“These results are consistent with Bogle. Bogle illustrates that returns earned by a group of investors must fall short of the reported market returns or mutual fund returns by the amount of the aggregate costs the investors incur. Thus, we can conclude that the additional costs of moving in and out of funds and lack of performance persistence will generally result in returns lower than those expected by investors. Moving in and out of investments based on categorizations that place undue reliance on recent performance and new information is likely to result in excessive trading and inferior performance results.”
If this is actually true, what is the point of actively managed funds?
“Barras, Scaillet, and Wermers evaluate the skill of active managers. Their study was intended to make general statements about the mutual fund industry rather than about any single mutual fund. They evaluate performance over the full set of mutual funds and separate them into three categories—skilled (generating positive alpha), unskilled (generating negative alpha), and zero-alpha. They add to previous research by explicitly accounting for skill and luck. Earlier empirical work either assumes no luck or full luck, thus producing biased conclusions about the prevalence of truly skilled and truly unskilled fund managers. Barras et al. conclude that 75.4 percent of the 2,076 funds analyzed were zero-alpha funds over their lifetimes. Of the remainder, only 0.6 percent were skilled and 24.0 percent were unskilled. In sum, Barras et al. conclude that the majority of actively managed domestic equity mutual funds have generated at most zero alpha after adjusting for luck, trading costs, and fees.”
and then
“These results are consistent with Bogle. Bogle illustrates that returns earned by a group of investors must fall short of the reported market returns or mutual fund returns by the amount of the aggregate costs the investors incur. Thus, we can conclude that the additional costs of moving in and out of funds and lack of performance persistence will generally result in returns lower than those expected by investors. Moving in and out of investments based on categorizations that place undue reliance on recent performance and new information is likely to result in excessive trading and inferior performance results.”
If this is actually true, what is the point of actively managed funds?