EQUITY markets in America and Europe have recently been showing tentative signs of a recovery from their late July lows. Yet investors—in both actively managed funds and in funds that mirror a particular stockmarket index—are smarting still. The average active fund in America has lost over 22% (fund-management fees included) since the end of December 1999, according to Lipper, a company that measures fund performance. In Britain actively managed equity funds have lost 31%. Passive funds, however, have fared even worse, on average. Pure index funds have lost over 27% in America since December 1999, and 32% in Britain.

The choice between active and passive funds is like steering between Scylla and Charybdis, the more so since disillusionment with equities in general set in. Anger is growing—if the newspapers' financial pages are anything to go by—with those who manage mortals' money. Particular scorn has been poured on those poorly performing active managers who claimed that it was precisely during tough times that they would come into their own against indexed funds. In Britain two-thirds of active fund managers underperformed the index last year, even before the fees that they charged are subtracted. These people are handsomely rewarded for losing money. Each year they pocket 1-2% of the assets they manage, on top of initial charges of as much as 5%. Indexers, by contrast, charge only 0.5% a year, with no upfront fees.

An average fund manager will beat the market some of the time. Over the long run, though, the great majority of fund managers will do no better than the market average, particularly once their charges are taken into account. The chances are slim of finding one of the blessed few who can show real, sustained skill in stock-picking. Even if you find one, you may discover that what made him good in one economic period will serve him less well in the next.

Believers in the so-called efficient-market hypothesis, developed by American economists in the 1960s, have tried to demonstrate the impossibility of consistent outperformance. They argue that all useful information that is available to market participants is already factored into a company's share price. Additional analysis of a share by, for instance, taking a closer look at a company's books or talking to its management—as well as all attempts at discovering patterns in price movements—will be futile. Fund management, says the efficient-markets crowd, is a zero-sum lottery in a random world.

This theory opened the door to those offering merely to track the index. The first S&P 500 index fund was started by Wells Fargo in 1973; it held all the stocks in that index. That fund was not open to the general public, but three years later Vanguard, a mutual-fund manager, offered investors an index fund that held all the stocks in the S&P 500 in proportion to their market capitalisation.

Index tracking grew hugely during the bull market of the 1980s and 1990s. In the bear market since early 2000, people have not pulled out much money from index funds—or at least, not yet. In America, the record levels of mutual-fund redemptions in June and July came mainly from actively managed funds. The world's biggest indexer, Barclays Global Investors, with $400 billion in index funds, claims net inflows (institutional as well as retail money) of $33 billion in the first six months of this year.

Not everybody buys the efficient-markets hypothesis, however. George Soros, a well-known speculator, thinks he made his money because markets often over- or undervalue things. He also challenges the view that share prices are simply a passive reflection of underlying value, or of the expected earnings of a company. A high share price might, for example, trigger certain actions: a public offering of a company's shares, for example, or a merger or an acquisition. A low share price, meanwhile, might stop plans for an initial public offering or a merger. This is what Mr Soros calls the market's “reflexivity”.

If knowledge of such a two-way relationship between share prices and assets can be put to good use, a fund manager might consistently do better than the market. Peter Lynch, formerly of Fidelity Investments, showed that a more old-fashioned investment technique—looking for good companies that the market fails for a time to appreciate—can also outperform.

Yet a few examples among a cast of many thousands of fund managers offer only small consolation to the average investor. Unless he wants to punt on fund managers as well as on equities themselves, he will almost always be better off—or, these days, rather less worse off—putting his money into an index fund.