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Noah Smith

Why Some Money Managers Succeed by Losing

Active money managers who trade a lot tend to underperform passive stock-market indexes. But they might serve a useful purpose, even if they cost investors billions of dollars in fees each year.
Win, place and show me the money.

Win, place and show me the money.

Photographer: Rob Carr/Getty Images

Every year, according to the New York Times, Americans pay about $600 billion in fees to so-called active money managers -- managers who try to earn market-beating returns by trading actively. Those fees are about equal to the gross domestic product of Switzerland.

 Of course, defining “active” asset management is difficult. For example, many people think of exchange-traded funds as passive investments, because they’re diversified. But if a money manager trades ETFs as if they were stocks, trying to time the market, that seems pretty active. Another gray area is so-called smart beta strategies, which try to beat the market without trading very much. However you slice it, we Americans pay a huge amount of money to third parties -- hedge funds, actively traded mutual funds, asset-management companies and family offices -- that promise to earn us superior returns. Much of this is a transfer from rich Americans outside of the finance industry to rich Americans within the finance industry. But a hefty chunk comes out of the pockets of middle-class Americans, much of whose savings are in pension funds and retirement plans that contract out to active money managers.