Why Cannot Active Funds be Replaced by Passive Funds?

This article’s purpose is to assess whether active funds may be comprehensively replaced by passive funds in the future. Generally, active funds continue to offer advantages and relevance, meaning they cannot be completely replaced. Accordingly, this paper analyses the future performance of active and passive funds in three sections, namely market effectiveness, market volatility, as well as investor behavior. The market efficiency hypothesis was adopted to derive a random-walk model, aiming to provide further clarification of active and passive funds’ varying efficiency and performance in various markets. In addition to varied performance in different periods of the same market, during periods of market expansion and recession, active fund management is characterized by superior performance during times of market recession. Additionally, a dearth of expertise, individual needs, and behavioral bias due to investor demand results in more investors being willing to purchase active funds.