Active fund managers love to talk about “alpha”: the extra return they claim to generate over market benchmarks. But groundbreaking new research suggests UK investors should be deeply sceptical about what they’re paying for.
A comprehensive study by academics Andrew Ang and Debarshi Basu, published in May 2025, examined whether active funds actually improve outcomes for investors once risk, costs and portfolio construction are properly accounted for.
Even when active funds generate alpha, the study found, the true value to investors is far smaller than headline figures suggest.
Only one in eight funds adds real value
The researchers analysed 1,203 US active equity funds over nine years, assessing how much a typical balanced investor — holding a 60/40 equity-bond portfolio — should be willing to pay.
Only 12% of funds delivered a positive utility benefit. In other words, seven out of eight failed to improve investor outcomes meaningfully.
The study’s most striking insight is that alpha, even when present, doesn’t translate directly into real-world value
Even among the 12%, the benefits were modest. The median utility gain was just seven basis points (0.07%) per year, significantly below what most UK investors currently pay for active funds.
The cost gap in the UK
The findings come as UK investors continue to shift away from active funds. Since January 2024, more than £22bn has been withdrawn from actively managed portfolios, while £23bn has moved into passive trackers.
Fees help explain the trend. Active UK equity funds typically charge between 0.75% and 1.25%, averaging around 0.9%, according to AJ Bell. Once platform and transaction costs are added, total costs can exceed 1% annually. By contrast, index trackers charge as little as 0.07%, with the cheapest options closer to 0.01%.
Alpha isn’t utility
The study’s most striking insight is that alpha, even when present, doesn’t translate directly into real-world value. While the average ‘style-adjusted alpha’ among utility-positive funds was 1.08%, the amount investors should be willing to pay for it was just 0.19%.
“Traditional alphas are a very incomplete measure of value-added for investors optimally holding equity-bond portfolios,” the authors note.
Most active funds behave like expensive index funds, with most returns coming from market exposure, not manager skill.
Even pure alpha falls short
The researchers also tested the value of “pure” alpha: stripping out all market exposure. Even when alpha was boosted to 6% annually, the average utility benefit reached just 0.5%, still below typical UK active fund fees.
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Their conclusion: “The investor’s allocation problem is at the total portfolio level where total risk and total returns matter.” Most of what active funds deliver is already captured by low-cost beta.
Bond funds: slightly better, still not worth it
The same pattern held for bond funds. Although 36% of active bond funds added positive utility, the median value investors should be willing to pay was just ten basis points — again, far below standard fees.
This helps explain the rapid rise of passive bond investing in the UK, with trackers gaining substantial market share.
What it means for investors and advisers
For DIY investors using Isas, Sipps or pensions, the message is simple: impressive-sounding metrics like alpha or Sharpe ratios don’t reflect how much value an active fund actually adds to your portfolio.
Unless a fund provides genuinely uncorrelated returns, it likely won’t justify its fee
The authors conclude that investors should be willing to pay no more than 19 basis points for the better-performing half of utility-positive funds. Most UK active funds charge 70–80 basis points more than their passive counterparts. The maths simply doesn’t add up.
Financial advisers should also reassess the role of active funds in model portfolios. Unless a fund provides genuinely uncorrelated returns, it likely won’t justify its fee.
The bottom line
When the true value of active management is measured in single-digit basis points, cost becomes critical. A globally diversified, low-cost index portfolio is likely to deliver more for less. Alpha may be appealing, but the arithmetic is unforgiving.
Robin Powell is a freelance journalist and editor of The Evidence-Based Investor
