Active versus passive: Does increased investments in passive funds have an effect on active fund performance?

Sammanfattning: In recent decades, there has been a shift towards investing in passively managed funds. Grossman and Stiglitz (1980) describe in their theoretical paper how the share of uninformed investors is positively correlated to the utility of being informed. Our hypothesis, based on Grossman and Stiglitz (1980) is that the excess returns of actively managed funds are positively correlated to the market proportion of passively invested capital. Using a bivariate regression model, we perform an empirical analysis of whether the excess performance of actively managed U.S. funds and the market proportion of passively invested capital are correlated. Our analysis did not find any significant results of the correlation existing when analyzing the entire sample of funds. When analyzing the correlation using smaller subsamples of funds, we found some results indicating a negative correlation, contrary to our hypotheses.