We argue that active management's popularity is not puzzling despite the industry's poor track record. Our explanation features decreasing returns to scale: As the industry's size increases, every manager's ability to outperform passive benchmarks declines. The poor track record occurred before...

We develop a performance evaluation approach in which a fund manager's skill is judged by the extent to which his investment decisions resemble the decisions of managers with distinguished performance records. The proposed performance measures are estimated more precisely than standard measures,...