Active Management

Managing a portfolio actively necessitates a manager or a team of managers.


What Is Active Management?

Active management refers to a manager(s) that manages a fund’s portfolio. To actively manage a portfolio, active managers use forecasts, analytical research, personal experience, judgment and fundamental analysis to make investment decisions on what to buy, hold and sell. 

How Does Active Management Work?

Investors who engage in active management are opposed to efficient market concepts. They believe making certain decisions can allow a portfolio to do better than the market. They think it is possible to profit using strategies that identify mispriced securities.

What Is the Goal of Active Management?

Active management aims to produce better returns than passively-run index funds. For example, a fund manager could try to outdo the S&P 500. However, achieving such success as an active manager is very difficult, no matter how talented one might be. Actively-managed funds generally come with higher fees than passively-managed funds.

Benefits of Active Management

Active management is successful with a fund manager’s right expertise, skill, experience and judgment. For instance, a fund manager could use their skills and expertise to invest in stocks that they believe are undervalued. They enjoy flexibility since their investment decisions are not tied to an index. Actively buying and selling allows them to compensate for losing investments with successful ones.

Risk and Active Management

Without following set benchmarks, risks can be managed more proficiently. Active management allows a fund manager to utilize various hedging strategies, such as short selling and using derivatives for portfolio protection.

Performance of Active Managers

Active management has generated a lot of controversy in recent years. Analyzing the data over the past decade, active managers who invested in small stocks performed better than the index. Data shows that 88% of such managers did better than the benchmark index before the fee deduction.

The Downside of Actively Managed Funds

One should always look out for the fees when investing in actively managed funds. In general, the fees are higher. Consequently, one should always consider how much in fees they will pay compared to using a passively managed fund.

How Does Active Management Apply to the Crypto World?

Since the crypto industry is still in its formative years, experiencing massive growth, it makes sense to engage in the active management of a portfolio.

For instance, some crypto coins worth billions today could lose a considerable chunk of their market cap once a project offering better utility enters the market. Therefore, it is vital to keep a close eye on developments in the DeFi world and centralized exchange (CEX), such as Binance or Kraken, to make the right choices at the right time.