[tptacek]

Levine does not think you should invest in actively-managed funds.

The little coda about active management makes more sense if you read him religiously, because this is a schtick of his. Passive management helps most investors. But the market as an entity benefits from active management, because active management makes prices more accurate. This despite the fact that for the most part, contributing to the accuracy of prices comes at the expense of the actively-managed funds.

So without active management, the passive funds would perform more poorly, because their prices wouldn't benefit from the corrections of people trading into them to profit from mispricing.

[evanpw]

Seconded. This is called the "Grossman-Stiglitz paradox".

There's also a kind of second-order version of market efficiency that says that active fund managers that can actually beat the market will increase their fees until their post-fee returns are the same as everyone else. So even if active _fund managers_ get compensated for making prices more efficient, there's no reason to believe that _fund investors_ will be.

[tjradcliffe]

Many years ago I did a comprehensive analysis of Canadian mutual fund returns over about 20 years, and found that the average return per year was dead on the market. The distribuiton of returns was Guassian and had a width of about 1%. I concluded from this that in fact fund managers can beat the market... by precisely amount they pay themselves.

This is evidence for the "second order version of market efficiency" your mention: it was uncanny, and put me into index funds for life (that, and the fact that there was no way of predicting from year-to-year which funds would beat the market the following year.)

[KingMob]

I think too many people are erroneously conflating active fund managers with active traders, and my major objection to the article stems from how the author blurs the line between the two. But I admit, I'm not a regular reader of the author.

The market needs active traders for stock prices to accurately reflect investor opinion, but actively managed funds are not the only source of active trading.

[damoncali]

I don't read him regularly, but I read it as him downplaying index funds as some sort of arbitrary, socially derived benchmark, which just isn't the case. He glosses over - he surely knows this given his background - all the efficient market theory that created the index funds in the first place.

There is a good reason that index funds are very difficult to beat consistently, and it's not because they are copying all the hard work everyone else does for fees. It's because you don't get paid for specific risk.

[Lazare]

No, not at all the point Levine was making.

But like tptacek said, you probably need to read Levine regularly to unpack his argument there; it was extremely self-referential.