Determinants of the Success of Active vs. Passive Investment Strategy

Richa Birla, University at Albany, State University of New York

Abstract

This study documents the monthly performance of active versus passive investing over the last 25 years. It also identifies several variables that are closely related to the current and next month’s success of one over the other. Three useful factors identified include the Fed funds rate, the VIX volatility index, and Russell Investments’ CrossVol^TM index. All three are valuable in explaining and predicting the success of active management to certain extent.