Understanding Active Management
Active management involves the management of a fund’s portfolio by one or more managers.
These managers rely on forecasts, analytical research, personal experience, judgment, and fundamental analysis to decide which securities to buy, hold, or sell.
How Does Active Management Work?
Active management is based on the belief that it is possible to outperform the market by making strategic decisions.
Active managers reject the efficient market hypothesis and aim to identify mispriced securities to generate better portfolio returns.
The Goal of Active Management
The primary goal of active management is to achieve superior returns compared to passively managed index funds.
Benefits of Active Management
Active management can be advantageous when the fund manager possesses the right expertise, skills, experience, and judgment.
It offers flexibility as investment decisions are not tied to an index. Active managers can use undervalued stocks and buy and sell securities to offset losses with profitable investments.
Risk and Active Management
Active management allows fund managers to employ various risk management strategies.
They can utilize hedging techniques like short selling and derivatives to protect their portfolios from market downturns or volatility.
The Downside of Actively Managed Funds
Investors should be mindful of the higher fees associated with actively managed funds.
It is essential to consider the fees incurred compared to passively managed funds when evaluating the potential benefits of active management.