Active management

Active management

Active management has become increasingly popular in recent years as investors have become more aware of the potential benefits of active management. Active managers may be able to create larger returns than passive managers in some cases, although this is not always the case. 

Active management can be a successful investment strategy for those willing to take on the additional risk and comfortable with an active manager making decisions about their portfolio. 

What is active management?

Active management is a strategy employed by investors to achieve a higher return than what would be generated by simply investing in a passive index fund. This is accomplished by analyzing companies and picking stocks that are considered undervalued by the market. Active management can be used with other investment strategies, such as value or growth.  

Strategies of active management

Many different strategies can be employed in active management, and the best strategy for any given situation will depend on the specific circumstances. Some common strategies include buying and holding, market timing, and active portfolio management. 

• Buying and holding 

It is a strategy where investors purchase stocks and hold them for an extended period, regardless of market conditions. This strategy is best suited for investors with a long-term time horizon who are not concerned about short-term fluctuations in the market. 

• Market timing  

It is a strategy where investors attempt to predict future market movements to buy or sell at opportune times. This strategy can be challenging to execute successfully, and even the best market timers will only be right a minority of the time. 

• Active portfolio management  

It is a strategy where investors actively manage their portfolios to generate higher returns than would be possible with a passive strategy. This often involves frequent trades to take advantage of market movements. Active portfolio management can be very time-consuming and expensive, and it is essential to remember that there is no guarantee of success. 

Theory of active management

Active management is a theory of investing that seeks to achieve a higher return than the market average by making active decisions about which securities to buy and sell.  

The theory claims that share prices do not always represent all available information and that by studying this information, investors may find and profit from mispriced stocks. Active managers often make investment choices using quantitative and qualitative data. 

Advantage and disadvantage of active management

There are several advantages and disadvantages to active management.  

On the plus side, active managers may generate higher returns than passive managers. And active managers may also be able to provide investors with more personalized service and advice.  

On the downside, active management may be more expensive than passive management, and it may also be more time-consuming. Additionally, active managers may be more likely to take on more risk than passive managers. 

The main disadvantage of active management is the higher costs associated with the research and analysis required to generate alpha. Active managers must also overcome the increased risk of making errors in their decisions. Nevertheless, many investors believe that the potential rewards of active management justify the costs and risks.

Uses of active management

Active management can be an excellent way to generate higher returns, as the investor is actively trying to beat the market. However, it also comes with higher risks. 

Active managers may use various strategies, including fundamental analysis, technical analysis, or a combination of the two. They may also use active risk management, which involves taking positions in securities to offset the risk of other positions in the portfolio.  

Active management can be used to achieve a variety of goals, including outperforming the market, generating income, protecting capital, and managing risk. It can be employed in both bull and bear markets.  

There are several benefits of active management for investors.  

• First, active managers can generate alpha or excess returns above the market.  
• Second, they can provide diversification, which can help to reduce overall portfolio risk. 
• Third, they can add value through tax-management strategies.  
• And fourth, they can provide active risk management, which can help to protect capital in down markets. 

Frequently Asked Questions