How 'Turnover' Might Change Everything We Think We Know About Active Management

A break from conventional wisdom.

Clifford Asness, managing principal and chief investment officer of AQR Capital Management LLC.

Photographer: Chris Goodney/Bloomberg *** Local Caption ***Cliff Asness

"Before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar," Bill Sharpe, a legendary figure in the world of modern finance, famously wrote back in 1991. "After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar," he added.

His mathematical rule has been considered incontrovertible by doomsayers of active management at a time when the amount of money held in passively-managed, or indexed accounts, is soaring. But Clifford Asness of AQR Capital Management LLC has spotted something that might give proponents of passive investment — including himself — some pause. 

Asness points to a paper by Lasse Pedersen, a Danish financial economist employed by AQR. In the paper, Pedersen argues that Sharpe ignores a key element of real-world investing that, once taken into account, completely undermines his argument.

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