I read an interesting analysis in the New York Times that compared a hypothetical stock index fund, with an actively managed stock fund, and a hedge fund. Because of higher fees and taxes the actively managed stock fund would have to outperform the index fund before taxes by an average of 4.3 percentage points per year to be a better long-term investment. The hedge fund would have to do 10 percentage points better over a 20 year period.
How many actively managed funds have pull off that feat – 13! You would have to be very lucky to figure out which 13 funds (out of several thousand) would be the ones to outperform over the next 20 years.
Read the whole article at http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html?scp=1&sq=index%20funds&st=cse