A new paper by Hannah Unterberg of UC’s Paul Merage School of Business finds that the rise of passive investing is dragging down active fund performance. Using U.S. equity fund data from 1984 to 2024, she shows that after 2010 the average annual four‑factor alpha of active funds dropped by about one percentage point and the formerly positive link between Active Share and returns reversed. The study attributes this to flow‑induced demand: when money leaves active funds for passive vehicles like SPY, managers must sell their overweight positions while the index fund buys stocks they are underweight, creating asymmetric price pressure that penalizes their tilts.

Controlling for flow‑driven trading explains the negative Active Share‑performance relation, indicating that underperformance stems from structural demand headwinds rather than eroding skill. Higher‑frequency tests using beginning‑of‑month passive flows corroborate the findings, and aggregate regressions show the industry passive share‑active‑passive return spread turned negative after 2010. Unterberg’s work won the Two Sigma Award for Best Paper in Investment Management at the 2026 Western Finance Association conference.

Alphaville notes that while the flow story is plausible, it offers a “passive‑active‑paradox is that rising skill a prerequisite for survival as weaker competitors, leaving only the toughest opponents.