Capital Fund Management’s Philip Seager challenged the belief that active managers beat the market by running 300 Monte‑Carlo tests. Each test randomly selected 50 S&P 500 stocks, rebalanced quarterly from 2000 to 2025, echoing Burton Malkiel’s monkey‑dart myth. The exercise revealed that random picks can match the risk‑free rate, but true skill remains unclear.

Random portfolios converge toward the market as the number of holdings grows, a fact the study quantified by tracking error. Five‑stock baskets produced over 15 % annualised error, while 50‑stock sets fell to about five %. At 500 stocks, the error dropped below three %, making active alpha almost impossible without concentration for managers who prefer broad diversification and still seek excess returns.

The experiment underscores the arithmetic hurdle that forces most active funds into index‑like performance once fees are considered. Only a handful of managers can sustain meaningful alpha, and even they face a narrow window between diversification and conviction. For the bulk, a random‑selection model delivers essentially zero net advantage to investors seeking superior returns without incurring excessive costs in practice.