Active Management: Knowing the Basics

Active management is a portfolio management strategy that involves performing accurate investments to generate returns that surpass the market.

It is a technique that attempts to produce excess returns by recognition, anticipation, and exploitation of short-term trends.

Active portfolio investors have deemed it possible to bring in profit from the stock market using any strategies that could spot mispriced securities.

Investment firms and fund sponsors believing in active management also considered that is possible to beat the market and hire qualified managers to handle one or more mutual funds of the business.     

How it Works

Active management may involve a single manager, co-managers, or even a group of managers that will try to achieve investment goals by actively deciding on the asset allocation and stock range to create returns.

Active managers decide on what securities to buy, hold, and sell by relying on analytical study, estimates, as well as using their own assessment and understanding. An active manager’s investment scope can take months, days, and even hours or minutes.       

The manager acquires and sells financial securities on account of a changing market conditions. He/she makes use of the market’s inadequacies by purchasing underrated or by short-selling securities that has been priced too high.

Active managers are also more likely to use leverage since they are about easing short-term risk as they about taking full advantage of short-term profits. This approach however, raises the possibility for greater risk in an active portfolio, but may also present larger returns.  

They may create less volatility or risk as well depending on the targets of a particular hedge or mutual fund, or investment portfolio. Reducing risk is deemed as the objective for generating returns bigger than the benchmark. Managers may use hedging strategies in case of prolonged market declines.

Advantages of Active Management

  1. Fund managers can outperform benchmark returns by investing in undervalued stocks
  2. Portfolio managers can choose a variety of investments rather investing in the market as a whole
  3. Active funds consent to benefits in tax management
  4. Managers can control market volatility or risks
  5. Investors can take further risk to acquire returns higher than the market

How to Create an Active Portfolio

  • Use quantitative measures, such as price/earnings (P/E) ratio and price/earnings to growth (PEG) ratios
  • Choose sector investments that are likely to provide long-term macroeconomic trends
  • Buy stocks of companies that are momentarily unpopular
  • Sell at a discount of their intrinsic value
  • Risk Arbitrage
  • Short Positions
  • Put Writing
  • Asset Allocation
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