Active and Passive Investing: Understanding Samuelson’s Dictum

Nicolae Gârleanu *, Lasse Heje Pedersen

*Corresponding author for this work

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Abstract

We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the " expected market portfolio." We make precise Samuelson's dictum by showing that active investors reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro- and micro-efficiency, fees, and assets managed by active and passive managers. Our findings help explain the rise of delegated asset management and the resultant changes in financial markets.
Original languageEnglish
JournalThe Review of Asset Pricing Studies
Number of pages62
ISSN2045-9920
DOIs
Publication statusPublished - 13 Aug 2021

Bibliographical note

Epub ahead of print. Published online: 13 August 2021.

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