Passive investing is compelling, but incomplete. Real-world investors face changing market regimes, fat-tailed risks and pathdependent wealth outcomes that are not fully captured by standard models. These features create a role for active management focused on adaptation and robustness: dynamic risk control, regime awareness and protection against severe losses. But they do not make active management easy. Markets remain hard to forecast, costs matter and apparent skill may reflect hidden tail risk. The case for active management is therefore real, but uneasy.
INTRODUCTION
The central economic problem in investment management is simple to state but difficult to solve: how should investors allocate capital when the future distribution of returns is unknown? One classic answer is passive investing. A passive investor holds every security in a pre-determined market in proportion to its market capitalisation (Sharpe, 1991). This view grew out of mean-variance optimisation in the 1950s, the Capital Asset Pricing Model in the 1960s and the efficient market hypothesis as formalised around 1970. Classical mean-variance analysis evaluates portfolio choices in terms of expected returns, variances and covariances. It has been enormously useful: it has improved diversification, lowered costs and challenged the performance of high-fee active strategies (Broeders, van Oord and Rijsbergen, 2019).
in VBA Journaal door Dirk Broeders & Kristy Jansen