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Academic Paper Affirms Critical Role of Active Management

Traders Magazine Online News, March 27, 2019

John D'Antona Jr.

Active investment management makes public securities markets more efficient, according to a new paper on the relationship between active investment management and the efficiency of the public securities markets in the United States. Conducted by Russ Wermers, Professor of Finance and Director, Center for Financial Policy at the Robert H. Smith School of Business, University of Maryland, the paper was supported by the Investment Adviser Association’s Active Managers Council. The IAA is the leading trade association representing SEC-registered investment management firms. 

Active Investing and the Efficiency of Security Markets finds that active managers counteract many of the biases of other investors and help to eliminate market anomalies that are created by the misbehavior of some investors.  Active management aids liquidity – evidence indicates that stocks held more heavily by actively managed funds are more liquid than those held more heavily by passively managed funds. In addition, evidence suggests that active managers are a conduit for the incorporation of news into prices benefitting the entire marketplace.

"All investors, both active and passive – as well as the real economy – benefit from the efforts and cost expenditures of active managers,” writes Professor Wermers. “In this light, the average “alpha” provided by active managers (meaning the excess return above the relevant benchmark index), even gross of management fees, does not adequately capture the value of the active management industry to capital markets.”

“The evidence is compelling – active management is critical to efficient markets,” said Karen Barr, President & CEO of the Investment Adviser Association. “Efficient markets encourage broader investor participation, they make diversifying risk easier and they encourage capital formation. It is crucial that investors – and policymakers – understand the valuable role that active management plays in promoting market efficiency.”

For the complete academic review please visit: Active Investing and the Efficiency of Security Markets.

About the IAA

The Investment Adviser Association (IAA) is the leading trade association representing the interests of SEC-registered investment adviser firms. The IAA’s more than 650 investment adviser member firms collectively manage assets in excess of $25 trillion for a wide variety of institutional and individual investors. For more information, visit or follow us on TwitterLinkedIn, and YouTube.

About the AMC

The IAA formed the Active Managers Council to support education and research on the value of active management for investors and the capital markets and to engage on relevant public policy issues. For more information, visit

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