Random portfolios have the power to revolutionize fund management.
There is no convincing evidence that more than a handful of funds have consistently outperformed. This should tell every active fund manager on the planet that the present form of performance measurement is inadequate.
Performance measurement via a benchmark is hopelessly noisy — it takes decades to get a real answer.
A fund manager that can outperform should do better when the tracking error constraint is removed. Much better to use random portfolios to measure the performance of active funds to see if they are adding value. Funds should be judged with minimum tracking error constraints. It is in the investor’s best interest for the active funds they invest in to be as uncorrelated as possible with the indices that they invest in passively. That means a large tracking error.
