Brattle Group PhD Candidate Award for Outstanding Research, WFA 2026
Presentations: WFA Annual Meeting (2026, scheduled); CICF (2026, scheduled); SFA Annual Meeting (2026, scheduled); University of California, Irvine (2026); TwinBeech Capital (2026)
Abstract: This paper studies whether the secular shift toward passive investing has affected active fund performance through flow-induced demand effects. Using U.S. equity fund data (1984-2024), I document a decline in active fund performance after 2010, with average annual four-factor alpha falling by around one percentage point and the previously positive relation between Active Share and performance reversing. These patterns contrast with theories predicting improved performance as the active sector shrinks. A flow-driven framework shows that capital reallocations toward passive funds generate asymmetric price pressure, penalizing funds' active tilts. Flow-induced demand significantly impacts fund returns, with the effects of passive flows persisting over multiple years. Controlling for flow-induced trading can explain the negative Active Share-performance relationship, suggesting that underperformance reflects structural demand headwinds rather than declining manager skill. Higher-frequency tests exploiting plausibly exogenous, beginning-of-month passive flows provide additional evidence.Â