When professional stockpickers beat the algorithms
hedge fund posted a 38% return—while msci’s broadest index of global stocks declined by 18%. Champagne corks were popping elsewhere, too. Strategas Securities, a brokerage and research firm, reckons that 62% of active fund managers investing in large American firms beat the s&p 500 index of such shares in 2022, the highest percentage since 2005.
Last year therefore snapped a miserable losing streak for stockpickers. Every year from 2010 to 2021, more than half of active managers who benchmarked their performance against the s&p 500 failed to beat it. In other words, the average fund manager was outclassed by a simple algorithm blindly buying every stock in the index.
Such algorithms—known as “passive" or “index" funds—are taking over. By 2021 they held 43% of the assets managed by American investment companies, and owned a greater share of the country’s stockmarket than their actively managed counterparts. The logic that drives passive funds is inescapable.
By definition, the performance of an index is the average of those who own the underlying stocks. Beating an index is a zero-sum game. If one investor does, another must lose out.
Active managers may spot a superstar stock that ends up leaving the rest in the dust. But it will also be in the index, so passive investors will buy it too. Meanwhile, active managers tend to charge fees that are orders of magnitude higher than passive ones: often 1-2% a year, and more for whizzy hedge funds, compared with as little as 0.03% for their algorithmic peers.
This drag on performance makes it all but inevitable that index funds will outpace human money managers in the long run. So how did fund managers outperform in 2022? One possibility is sheer luck. Pick a group of stocks from
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