Morgan Stanley explores how stock return dispersion shapes the opportunity for active managers to generate alpha, arguing that skill only pays off when dispersion creates meaningful differentiation. The paper suggests most managers struggle, with average information ratios around -0.20, yet highlights that being wrong often can still produce strong outcomes if winners are large enough.
Dispersion And Alpha Conversion
Morgan Stanley
Michael Mauboussin, Dan Callahan
Research
17 Pages
Key Takeaways
Dispersion Drives Opportunity: Russell 1000 dispersion ranged from 35.1% to over 50%, showing wider spreads create more chances for active managers to outperform benchmarks
Average Skill Falls Short: Nearly 1,900 U.S. equity funds had a mean information ratio of -0.20, while top quartile managers reached about 0.87, highlighting a steep performance gap.
Winning Size Matters More: A 30% batting average paired with a 2.6 win/loss ratio can generate an information ratio near 0.30, proving payoff asymmetry outweighs accuracy.
Join our newsletter to have all of this content + Exclusive Newsletter Bonus Content delivered to your inbox every week
