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11 Active vs. Passive Asset Management: An Update Notes 1. Note that in this study we equate a manager's alpha (i.e., risk-adjusted return) with his skill. This, of course, does not need to be the case, as conditions beyond the manager's control (e.g., fund's size) may limit a potentially skilled manager's ability to produce a positive risk-adjusted return (see, for example, Berk & Green 2004 and Berk 2005). Still, a manager who might be skilled, but unable to deliver a positive risk-adjusted return due to some external constraints, is observationally equivalent to an unskilled manager, so in this study we treat these two groups as being equal. Also important, a manager might be able to deliver positive gross (i.e., before expenses) alpha, whereas the manager's net (i.e., after expenses) alpha might be negative. All our results are net of expenses, so our evaluation of whether a manager is skilled or not is necessarily related to the expenses that the manager charges. 2. In this section we describe the results of applying the methodology described in sections 2.1 and 2.2. 3. The Appendix contains the plots of the time trends of proportions of positive and negative alpha managers for all the categories that we have analyzed. 4. This viewpoint also was echoed recently by Morningstar's John Rekenthaler (https://www.morningstar.com/articles/902951/intermediateterm-bond-managers-pull-ahead.html). 5. The regression here refers to a linear OLS regression of a manager's current net returns against current performance of the manager's benchmark. 6. The point of the confidence intervals is to denote all the other likely values of an estimate. Confidence intervals, in addition to the estimate itself, are helpful for understanding the precision of the estimate. The more volatile the data, the less precise the estimate (i.e., the wider the confidence interval). References Ang, A., Hodrick, R. Xing, Y. and X. Zhang. "The Cross-Section of Volatility and Expected Returns." The Journal of Finance, 2006. AQR. "The Illusion of Active Fixed Income Diversification," 2017. Alternative Thinking, 2017/Q4. Berk, Jonathan B. and Richard C. Green. "Mutual Fund Flows and Performance in Rational Markets." Journal of Political Economy. 2004, Vol. 112, Issue 6, Pages 1269-1295. Banz, R. "The Relationship Between Return and Market Value of Common Stocks." Journal of Financial Economics, 1981. Basu, S. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis." Journal of Finance, 1977. Berk, Jonathan B. "Five Myths of Active Portfolio Management." Journal of Portfolio Management. 2005, Vol. 31, Issue 3, Pages 27-31. Fama, Eugene F. and Kenneth R. French. "A five-factor asset pricing model." Journal of Financial Economics, 2015. Harvey, Campbell R. and Liu, Yan, 2010. "A Census of the Factor Zoo." Available at SSRN: https://ssrn.com/abstract=3341728 or http://dx.doi.org/10.2139/ssrn.3341728 Jegadeesh, N and S. Titman. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency." The Journal of Finance, 1993. Novy-Marx, R. "The Other Side of Value: The Gross Profitability Premium." Journal of Financial Economics, 2013. Roisenberg, Leon, Raman Aylur Subramanian, George Bonne. "Anatomy of Active Portfolios". MSCI Research Insight. 2017.