John C. Bogle, the founder of Vanguard (mentioned in the article) wrote a book called "The battle for the soul of capitalism" [1] where he describes his motivation to found Vanguard. In summary he sees that funds managers add little value but extract too much money from risk takers (=investors) and thereby turn capitalism up side down. Sounds like his thesis is winning.
Neither mutual funds nor hedge funds as a whole can match a low fee index like Vanguard. Of course there are individual outliers that outperform, but predicting which funds will win in the future is no easier than picking individual securities that will win in the future.
It's becoming pretty clear that Buffett will win his 10-year bet that the Vanguard would beat what Protege Partners thought were the five best hedge funds.
It'll be interesting to see what the new equilibrium settles out to as more and more people index. It's pretty obvious everyone can't index and as more people do, there are more opportunities for smart money. But what form is that smart money going to mostly take? Large institutional investors -- pension funds, charitable endowments, sovereign wealth funds, etc. -- either investing directly or via outside money managers? Partnership style hedge funds? Family offices for ultra high net worth individuals? Or will the mass market long only mutual fund make a comeback?
[1] http://www.amazon.com/Battle-Soul-Capitalism-John-Bogle/dp/0...