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Active Management

Definition

Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index. In passive management, investors expect a return that closely replicates the investment weighting and returns of a benchmark index and will often invest in an index fund.

Active management is a strategy for managing the portfolio of an investment fund. It implies the use of a manager or a team which is expert in finding the relevant knowledge about different market elements to take the best investment decision according to human judgments rather than simply using a set of statistics.

Active management is different from indexing which a form of passive management. Active managers usually employ their experience to identify market behaviors, and use the given data to convert it into more useful information. They are responsible for buying, holding, and selling securities in this management method.

Advantages of Active Management

There are many high performance indexes which are available these days to help in taking an investment decision. The aim of active management is to ensure that a fund can consistently perform better than the indexing standards. This practice differs from the use of efficient market hypothesis. It relies on the use of multiple strategies in order to locate the best securities for investment.

The aim of active management is to find underpriced funds by using statistical tools, and then relying on industry experience. This experience and the availability of the trends of the previous years allow active managers perform better, and really help a fund gain an upper hand and beat an index such as the Standard and Poor’s 500 index.

Difficulties in Active Management

The indexes used in fund management are designed with a set of best practices, and it can be very difficult to predict the market behavior based on human cognition. This means that most active managers fail to perform better than the proposed indexed funds, but there are always some who are able to join the dots together and find a dynamic strategy that allows their active funds to perform better that indexed funds.

The Goal of Best Performance

The active fund manager often needs the relaxation to be able to allocate funds in different market classes such as move funds between bonds and active shares. Most investors have a fixed portfolio and they often do not allow managers to move among different market commodities because they already have an asset allocation in place.

Dynamic investors though can find the best results with active management that do not need to fix the location of a fund and allow managers to invest in the best market security which may alter with the change of time.


Further Reading


Scale and skill in active management
www.sciencedirect.com [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …

Active share and mutual fund performanceActive share and mutual fund performance
www.tandfonline.com [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …

Portfolio constraints and the fundamental law of active managementPortfolio constraints and the fundamental law of active management
www.tandfonline.com [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …

Indexing and active fund management: International evidenceIndexing and active fund management: International evidence
www.sciencedirect.com [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …

Active management in mostly efficient marketsActive management in mostly efficient markets
www.tandfonline.com [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …

Return dispersion and active managementReturn dispersion and active management
www.tandfonline.com [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …

Asset management fees and the growth of financeAsset management fees and the growth of finance
www.aeaweb.org [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …

Rehabilitating the role of active management for pension fundsRehabilitating the role of active management for pension funds
www.sciencedirect.com [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …

Active management, fund size, and bond mutual fund returnsActive management, fund size, and bond mutual fund returns
onlinelibrary.wiley.com [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …

Overconfidence and active management: An empirical study across Swiss pension plansOverconfidence and active management: An empirical study across Swiss pension plans
www.tandfonline.com [PDF]
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳ s ability to outperform passive benchmarks declines …



Q&A About Active Management


Why do most actively managed funds fail to beat their proposed indexed funds like SPY?

Most actively managed funds fail because they cannot join dots together effectively

What is active management?

Active management is a strategy for managing the portfolio of an investment fund. It implies the use of a manager or a team which is expert in finding the relevant knowledge about different market elements to take the best investment decision according to human judgments rather than simply using a set of statistics.

How is active management ideally performed?

Ideally, the active manager exploits market inefficiencies by purchasing securities that are undervalued or by selling securities that are overvalued. Either of these methods may be used alone or in combination. Depending on the goals of the specific investment portfolio, hedge fund or mutual fund, active management may also serve to create less volatility (or risk) than the benchmark index. The reduction of risk may be instead of, or in addition to, the goal of creating an investment return greater than the benchmark.

How do you identify market behaviors with active management?

You can identify market behaviors by using experience and data.

How does active management help you ensure your fund consistently performs better than indexing standards?

By using multiple strategies, you can locate the best securities for investment and then rely on industry experience to perform better than indexing standards. This practice differs from the use of efficient market hypothesis because it relies on statistical tools to find underpriced funds before relying on industry experience. The aim of active management is to find underpriced funds by using statistical tools, and then relying on industry experience. This experience and availability of trends allow managers perform better and gain an upper hand over indexed funds such as S&P 500 Index Fund (SPY). The indexes used in fund managem""ent are designed with set practices, making it difficult for investors to predict market behavior based on human cognition; most actively managed funds fail to beat their proposed indexed funds but there are always some who join dots together and find dynamic strategies that allow their actively managed funds to outperform SPY.""

What are some high performance indexes that are available today?

There are many high performance indexes that are available today, such as Standard and Poors 5 Index.

What factors can be used for constructing portfolios?

Active portfolio managers may use a variety of factors and strategies to construct their portfolio(s). These include quantitative measures such as price-earnings ratios and PEG ratios, sector investments that attempt to anticipate long-term macroeconomic trends (such as a focus on energy), stock picking based on fundamentals like earnings growth potential and other qualitative characteristics like corporate culture etc., etc..

What does active management differ from?

Active management differs from indexing, which is passive management.

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