On the Size of the Active Management Industry
Abstract
We argue that active management’s popularity is not puzzling despite the industry’s poor track record. Our explanation features decreasing returns to scale: As the industry’s size increases, every manager’s ability to outperform passive benchmarks declines. The poor track record occurred before the growth of indexing modestly reduced the share of active management to its current size. At this size, better performance is expected by investors who believe in decreasing returns to scale. Such beliefs persist because persistence in industry size causes learning about returns to scale to be slow. The industry should shrink only moderately if its underperformance continues.
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The diminished outperformance of AI funds is consistent with competitive pressure from the broader quantitative investment ecosystem eroding opportunities available to all AI-driven strategies.
“Second, the competitive pressure from the broader quantitative investment ecosystem-including firms that use AI/ML methods without explicit disclosuremay erode the opportunities available to all AI-driven strategies, consistent with industry-level decreasing returns to scale in active management (e.g., Pástor and Stambaugh, 2012).”
From The Growth and Performance of Artificial Intelligence in Asset Management (2026) · cites this paper as Pástor and Stambaugh, 2012
As highlighted in Pástor and Stambaugh (2012), investors' slow learning about both this ability and returns to scale drives the size of the active management industry.
“As highlighted in Pástor and Stambaugh (2012), investors' slow learning about both this ability and returns to scale drives the size of the active management industry.”
From The Growth and Performance of Artificial Intelligence in Asset Management (2026) · cites this paper as Pástor and Stambaugh (2012)
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References 41 · Cited by 236
- Authors
- Pástor, L., & Stambaugh, R. F.
- Affiliations
- National Bureau of Economic Research (US)
- Venue
- Journal of Political Economy
- Publisher
- University of Chicago Press
- Published
- 2012-08
- Volume
- 120
- Issue
- 4
- Pages
- 740-781
- ISSN
- 0022-3808 (ISSN-L)
- 1537-534X
- OpenAlex
- W3122486806
- Cited by
- 236
- References
- 41
- Citations by year
- 2026: 12 · 2025: 15 · 2024: 12 · 2023: 12 · 2022: 20 · 2021: 19 · 2020: 28 · 2019: 12 · 2018: 22 · 2017: 15 · 2016: 16 · 2015: 12 · 2014: 15 · 2013: 15 · 2012: 5
- FWCI
- 24.99
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Journal of Political Economy (publishedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
- Social Sciences › Business, Management and Accounting › Accounting › Financial Analysis and Corporate Governance
- Keywords
- active management, mutual fund industry, decreasing returns to scale, passive investing, fund performance, industry size, investor beliefs
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