Financial humans or financial robots?
The Efficient Markets Hypothesis isn’t right; fund managers can beat the market consistently (although less and less as they manage more money). In fact, the average fund manager will beat the market consistently, before fees. But when the funds are young and small, investors don’t know which ones are the market-beaters.
This idea was explained in a seminal 2004 paper by Jonathan Berk, then of the University of California-Berkeley, and Carnegie Mellon’s Richard Green, called “Mutual Fund Flows and Performance in Rational Markets.” If you don’t know this paper, you really should.
The basic model is this: Money managers start out with only a small amount of AUM. Bad money managers, whose strategies fail, leave the market (though new ones arrive to take their place). Good money managers, whose strategies beat the market, keep beating the market until observers realize how good they are. The observers — investors — then keep putting money into the good funds. But since even the best funds’ strategies don’t scale up infinitely, this reduces the performance of the good funds over time.
Maybe investors are beginning to realize that chasing superstar performance is a losing game for everyone but the superstar himself.