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What is Active Management?
Active management (also called active investing) is an approach to investing. In an actively managed portfolio of investments, the investor selects the investments that make up the portfolio. Active management is often compared to passive management or index investing.
Understanding Active Management
The word “active management” refers to the process of tracking the performance of an investment portfolio and making buy, hold, and sell decisions concerning the assets in it by an investor, a professional money manager, or a team of experts. Any investment manager’s purpose is to outperform a predetermined benchmark while also achieving one or more additional objectives such as risk management, tax minimization, or adherence to environmental, social, and governance (ESG) requirements for investing. Active managers may differ from others in how they achieve some of these objectives.
Active managers, for example, may use investment analysis, research, and projections, which may include quantitative techniques, as well as their own judgment and experience, to decide which assets to buy and sell.
Their method could be strictly algorithmic, completely discretionary, or somewhere in the between.
Passive management, also known as indexing, on the other hand, adheres to simple guidelines that attempt to track an index or other benchmark by replicating it. Those who support passive management argue that the best results are obtained by purchasing assets that replicate a specific market index or indices. Their argument is that passive management eliminates the shortcomings of human biases, resulting in improved performance. However, studies contrasting active and passive management have only served to re-ignite the argument over the relative merits of each strategy.
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