In March, we wrote about a yet to be published paper by Kenneth French called “The Cost of Active Management”. In this paper, French concludes that the total cost of the “futile search for superior returns” is 67 bps or about 10% of annual returns (resulting from management fees and trading costs).  At the time, all we had to go on was a New York Times article about the paper by well-known financial commentator Marc Hulbert.  A recent interview with French by the online newsletter Advisor Perspectives brought this paper back to our attention.  The full study is now available online and we felt was worthy of a second, more detailed, examination.

Immediate benefits of active management

Institutions have increased their allocation to passive investing significantly over the past 20 years, prompting Advisor Perspectives to wonder if institutions wising up to high active management fees.  Interestingly, French points to increasing institutional hedge fund allocations as evidence that they are not, in fact, becoming more passive after all:

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