Active Investing as a Negative Sum Game: A Critical Review

Vol. 19, No. 2, 2021

Geoffrey J. Warren

The literature on whether active management adds value is examined through the prism of the proposition by Sharpe (1991) that active investing is a negative sum game after costs. Focal points include how active fund research does not directly test Sharpe’s proposition and seems inconsistent with it acting as a constraint, and the gaps that may leave room for active managers to outperform. It is argued that greater attention needs to be paid to the importance of investor circumstances and market conditions for the active-passive choice, in particular the fee paid, investor objectives and asset category.