Alpha Theory © Copyright 2020. All rights reserved.

Positive skew can be a primary contributor to active strategies’ underperformance relative to their benchmark (see chart below).

(866) 482 2177

5701 Westpark Drive, Suite 105

Charlotte, NC 28217

POSITIVE SKEW IS NEGATIVE FOR ACTIVE MANAGERS

POSITIVE SKEW IS NEGATIVE FOR ACTIVE MANAGERS

So, what is positive skew? Positive skew is a phenomenon present in populations where large “positive” outliers cause the average to be higher than the median. Net worth is an example of something with a very large positive skew. The top 1% of the net worth distribution holds 45% of the wealth according to __Wikipedia__. For example, Jeff Bezos’s net worth dramatically skews the distribution as it is equal to 2.3 million US citizens at the median net worth of roughly $61,000. If you were to pick a random American, there is a ~70% chance that you would select someone below the mean of $404,000. This is an example of severe positive skew.

**Percentage of Funds that Underperformed the S&P 500 (after fees)**

Source: S&P Dow Jones Indices, LLC