Why most active managers continue to underperform

Summary: Most active fund managers underperform not because markets are unbeatable, but because incentives reward consensus, activity and short-term visibility. Drawing on ideas from Rupal Bhansali and Pulak Prasad, this piece explains why error avoidance, selectivity and patience are what can still make active investing work. For over a decade, active equity managers have been losing the argument. Study after study shows that the majority underperform their benchmarks after fees. Assets have steadily migrated to passive funds, and with it, a narrative has taken hold: markets are too efficient, alpha is illusory and discretion is a liability. Yet, this conclusion is both too convenient and flawed. Two books – Rupal Bhansali’s Non-Consensus Investing: Being Right When Everyone Else Is Wrong (2019) and Pulak Prasad’s What I Learned About Investing from Darwin (2023) – offer a nuanced defence of thoughtful active management. They argue, through very different intellectual lenses, that the problem is not active management per se, but how it is practised, incentivised and constrained. The perils of active management: Incentives and underperformance Active management, as it exists today, is structurally designed to fail, and it has. Over 75-90 per cent of US equity funds fail to outperform the market across 5-20-year periods, with similar trends in India. The central problem with active management is not a lack of intelligence or information. It is misaligned incentives. As Bhansali points out, the industry is designed to hug the benchmark, not beat it. A fund manager’s greatest fear is not losing money for you; it is underperforming their peers by a wide margin and getting fired. This leads to ‘closet indexing’ – buying the same popular stocks as everyone else (the consensus) to ensure that, if they go down, at least they go down with the crowd. You cannot outperform by doing what everyone else is doing. As Bhansali observes, “It is not enough to be right; one must be non-consensus to earn excess returns.” Yet, non-consensus positioning is precisely what institutional incentives discourage. Underperformance, in this context, is not surprising; it is inevitable. This structural flaw creates an opportunity for passive manage

This article was originally published on February 01, 2026.