I think this is pretty naive. Customers (generally large institutional investors) don't choose active managers because those managers provide superior returns.

I think this is pretty naive. Customers (generally large institutional investors) don't choose active managers because those managers provide superior returns. They choose them for the same reason that people choose big consulting firms like BCG or McKinsey: status and affiliation, nepotism, internal power struggles, and cover-your-ass blame insurance. I mentioned in a previous thread about this -- I worked for several years in an asset management firm before moving on to other things. We frequently assisted clients in the process of firing us. We would prepare white papers for them, give them data and slick charts. Sometimes this would literally disrupt the quants and research team and we had to join in creating materials that would be used by client board members in their presentation of the decision to fire us. Sometimes we even had to provide examples of this kind of work when a client was hiring us -- our helpfulness and data services during the times when we are fired was actually a prominent selling point. We were basically saying, hire us now and you get to look fancy. Fire us later and we'll set you up to look principled and full of conviction to do the right thing as a sophisticated board member. There are all kinds of laws restricting gifts you can give to clients or receive from clients, and just as many stories about how such-and-such a client took some regional sales manager out to a strip club, or flew them some place and got them a reservation at some exclusive restaurant or something. It's all political. As a technical person, you are hired to look fancy on paper. I remember overhearing my boss bragging to a prospective client that the team had an "Ivy League graduate" leading up their quantitative software development ... on my second day of work! I had zero financial experience of any kind at the time. It was ludicrous. It's painful to see everyone buying into this. I hope beyond all hope that clients do a better job of actually holding firms responsible for returns. Firms that don't engage in legitimate statistical research to determine an edge in investing will fold up, and firms that actually have a chance at superior returns might actually start letting their staff do real research work instead of bullshit marketing and catering to client political whims. But that's a fairy tale world. This will all blow over and clients will continue dedicating huge blocks of their endowments or retirement funds to active managers for political reasons and will continue happily not holding those managers accountable for inferior returns.