Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. Investment management, the professional management of various securities (shares, bonds etc) and other assets (e. ...

Ideally, the manager exploits market inefficiencies by purchasing securities that are undervalued, and/or (less frequently), short selling securities that are overvalued. Depending on the goals of the specific investment portfolio or mutual fund, active management may also strive to achieve a goal of less volatility or risk than the benchmark index instead of, or in addition to, greater long-term return. Efficient fuked up market theory is a field of economics which seeks to explain the workings of capital markets such as the stock market. ... For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable interest representing financial value. ... To meet Wikipedias quality standards, this article or section may require cleanup. ...

Active management is the opposite of passive management, where the manager does not seek to outperform the benchmark index. Passive management is a financial strategy in which a fund manager makes as few portfolio decisions as possible, in order to minimise transaction costs, including the incidence of capital gains tax. ...

Active portfolio managers may use a variety of strategies for picking equities. These include quantitative measures such as P/E ratios and PEG ratios, sector bets that attempt to anticipate long-term macroeconomic trends (such as a focus on energy or housing stocks), and purchasing stocks of companies that are temporarily out-of-favor or selling at a discount to their intrinsic value. Some actively managed funds also pursue strategies such as merger arbitrage, short positions, option writing, and asset allocation. In finance, the P/E ratio of a stock (also called its earnings multiple, or simply multiple, P/E, or PE) is used to measure how cheap or expensive share prices are. ... The PEG ratio is a valuation metric for determining how much more should be paid (in stock price) for a companys expected future growth. ... Macroeconomics is the study of the entire economy in terms of the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behavior of prices. ... Risk arbitrage, or merger arbitrage, is an investment or trading strategy often associated with hedge funds. ... It has been suggested that this article or section be merged with Short selling. ... In finance, an option is a contract whereby one party (the holder or buyer) has the right but not the obligation to exercise a feature of the contract (the option) on or before a future date (the exercise date or expiry). ... Asset allocation A large part of financial planning is finding an asset allocation that is appropriate for a given person in terms of their appetite for and ability to shoulder risk. ...

The effectiveness of an actively-managed investment portfolio obviously depends on the skill of the manager and research staff. In reality, the majority of actively managed collective investment schemes rarely outperform their index counterparts over long periods of time (assuming that they are benchmarked correctly)^{[citation needed]}. When all expenses are taken into account one might actually see underperformance even if the securities outperform the Market. However, if it was not for active management, passive management would become a gamble, thus the incentives for active management will aways exist. In addition, many investors find active management an attractive strategy within market segments that are less likely to be fully efficient, such as investments in small cap stocks. A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than may be feasible for an individual investor and to share the costs of doing so. ... Market capitalization, often abbreviated to market cap, is a measurement of corporate size that refers to the current stock price times the number of outstanding shares. ...

Advantages of active management

The primary attraction of active management is that it allows selection of investments that do not echo those of the market as a whole. Investors may have a variety of motivations for following such a strategy:

• They may be skeptical of the efficient market theory, or believe that some market segments are less efficient than others.
• They may want to manage volatility by investing in less-risky, high-quality companies rather than in the market as a whole, even at the cost of slightly lower returns.
• Conversely, some investors may want to take on additional risk for the chance of higher-than-market returns.
• Investments that are not highly correlated to the market are useful as a portfolio diversifier.
• Some investors may wish to follow a strategy that avoids or underweights certain industries compared to the market as a whole, and may find an actively-managed fund more in line with their particular investment goals. (For instance, an employee of a high-technology growth company who receives company stock or stock options as a benefit might prefer not to tie up their other assets in the same industry.)

Several of the actively-managed mutual funds with strong long-term records invest in value stocks. Passively-managed funds that track broad market indices such as the S&P 500 have money invested in both growth and value stocks. Efficient fuked up market theory is a field of economics which seeks to explain the workings of capital markets such as the stock market. ... In financial terminology, a stock that appears attractive using the fundamental criteria of stock valuation because of valuable assets, particularly cash and real estate, owned by its company. ... The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. ...

Disadvantages of active management

The most obvious disadvantage of active management is that the fund manager may make bad investment choices or follow an unsound theory in managing the portfolio. Those who are considering investing in an actively-managed mutual fund should evaluate the fund's prospectus carefully. The majority of actively managed large- and mid-cap stock funds in Unites States fail to outperform a passive stock index in recent decades.[1] A prospectus is a legal document that institutions and businesses use to describe what they have to offer for participants and buyers. ...

Active fund management strategies that involve frequent trading generate higher transaction costs which cut into the fund's return. In addition, the short-term capital gains resulting from frequent trades have an unfavorable tax treatment when such funds are held in a taxable account. In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ...

When the asset base of an actively-managed fund becomes too large, it begins to take on index-like characteristics because it must invest in an increasingly diverse set of investments instead of only those which represent the fund manager's best ideas. Many mutual fund companies close their funds before they reach this point, but there is potential for conflict of interest between the fund manager and shareholders because of the additional management fees that can be collected by keeping the fund open.

Real active management

Equity fund managers usually do not have board members at the firms in which they have an equity stake, and they do virtually nothing about the future performance of the firm. So buying and selling equity is not active management of the companies; it is just an active transaction of equity in the fund.

Real active management is done by the people that work at the company, every employee and manager. Private-equity is often real active management since a privately owned company have a small number of owners and usually have just one owner that make strategy decisions at the board level. Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. ...

See also

• Investment management
• Index fund
• Passive management

Investment management, the professional management of various securities (shares, bonds etc) and other assets (e. ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ... Passive management is a financial strategy in which a fund manager makes as few portfolio decisions as possible, in order to minimise transaction costs, including the incidence of capital gains tax. ...

External links

• Article: Do Active Mutual Fund Managers Have An Inherent Conflict of Interest?
• The Arithmetic of Active Management, where William F. Sharpe demonstrates that passive management will always outperform active management on average.

William Forsyth Sharpe (born June 16, 1934) is Professor of Finance, Emeritus at Stanford Universitys Graduate School of Business and the winner of the 1990 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. ...