are high management fees worth the cost 
active fund managers rely on inefficiencies and mispricing in the market to identify stocks that have the potential to outperform the market the efficient market hypothesis emh has shown that stock prices fully reflect all available information and expectations however so current prices are the best approximation of a company s intrinsic value this would preclude anyone from consistently exploiting mispriced stocks because price movements are largely random and driven by unforeseen events the emh therefore implies that no active investor can consistently beat the market over long periods except by chance higher cost actively managed funds do tend to underperform lower cost passively managed funds in all categories according to decades of morningstar research research by nobel laureate william sharpe has shown that after costs the return on the average actively managed dollar will be less than the return on the average passively managed dollar for any time period 2sharpe concluded that active fund managers underperform passive fund managers not because of any flaw in their strategies but because of the laws of arithmetic active fund managers would have to achieve an excess return of more than 2 just to account for the average 1 19 management fee to beat the market by only 1 hedge fund management feeshedge funds charge notoriously high fees that have become controversial as performance has often lagged the market their fee structure is commonly referred to as two and twenty because it consists of a flat 2 of total asset value and 20 of all profits earned 3the plan is often criticized but it s been the norm since alfred winslow jones founded what is often considered to be the first hedge fund aw jones co in 1949 the standard has come under pressure as competition has increased and investors have become discontent causing managers to often implement lower fees performance hurdles and claw backs if performance isn t met 