Scale Works Against Active Skill
An overwhelming body of evidence clearly demonstrates that past performance isn’t prologue, which presents a problem for investors who believe active management is the winning strategy. Without the ability to rely on past performance as a predictor, there is really no way to identify ahead of time the few active managers that will go on to outperform in the future.
There has been much debate in the literature, however, about why such a lack of persistence in performance occurs. Some believe it’s because the markets are highly efficient, or at least efficient enough to make it very difficult for skill differences to allow for repeat performances.
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