Fama takes slap at active management

Finance star calls active management "zero-sum game".
OCT 13, 2013
Eugene Fama, a man widely regarded as the father of modern finance, last Monday held firm to his staunch opposition to active management and high fees while advocating a simplified system of asset management. “Active management is a zero-sum game before cost, and the winners have to win at the expense of losers,” he told an audience of financial professionals at the Investment Management Consultants Association's Advanced Wealth Management Conference. Asked where he thinks alternative investments belong in a portfolio strategy, Mr. Fama, Robert R. McCormick Distinguished Service Professor at the University of Chicago's Booth School of Business, first emphasized his distaste for any strategy that self-reports performance, then elaborated by saying that he can't understand why hedge funds are attracting assets.

No laughing matter

“I can't figure out why anyone invests in active management, so asking me about hedge funds is just an extreme version of the same question,” he told the audience. Although many of his responses drew laughs, Mr. Fama wasn't joking in his criticism of what he views as bad investment decisions. “Since I think everything is appropriately priced, my advice would be to avoid high fees. So you can forget about hedge funds,” Mr. Fama said. He contends that diversification and asset management are unnecessary and that investments can be limited to U.S. index funds. “It doesn't matter that much,” Mr. Fama said of investing outside U.S. markets. “If I were to take the U.S. market and combine it with all other markets, the effect on return would be minimal,” he said. “The U.S. market is so well-diversified already that combining it with global markets doesn't really matter.” Mr. Fama dismissed market concerns about the beginning of tapering of the five-year quantitative-easing program as a non-issue. Citing the strategy of buying short-term debt in order to finance the purchase of long-term debt, he said: “I don't understand why everyone is paying attention to this tapering,” Mr. Fama said. “The Fed is using one kind of bond to buy another kind of bond,” he said. “What's the big deal, and why is anyone taking the Fed seriously?”

Latest News

Integrated Partners, Kestra welcome multigenerational advisor teams
Integrated Partners, Kestra welcome multigenerational advisor teams

Integrated Partners is adding a mother-son tandem to its network in Missouri as Kestra onboards a father-son advisor duo from UBS.

Trump not planning to fire Powell, market tension eases
Trump not planning to fire Powell, market tension eases

Futures indicate stocks will build on Tuesday's rally.

From stocks and economy to their own finances, consumers are getting gloomier
From stocks and economy to their own finances, consumers are getting gloomier

Cost of living still tops concerns about negative impacts on personal finances

Women share investing strengths, asset preferences in new study
Women share investing strengths, asset preferences in new study

Financial advisors remain vital allies even as DIY investing grows

Trump vows to 'be nice' to China, slash tariffs
Trump vows to 'be nice' to China, slash tariffs

A trade deal would mean significant cut in tariffs but 'it wont be zero'.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.