Definition
The term active management refers to a portfolio manager that makes investments in an attempt to outperform a benchmark index. Active managers will use research reports, as well as pull from their experiences, when making investment decisions.
Explanation
When a fund is said to be actively managed, investors can expect the portfolio manager to purchase securities they believe are undervalued, and sell short those they believe are overvalued. Active management is the opposite of passive management, which attempts to minimize the tracking error between a portfolio and a market index such as the S&P 500.
Active managers will use a variety of research reports, including those that examine the fundamental strengths of stocks, in an attempt to identify those securities that are both undervalued as well as overvalued. Actively managed funds may also pursue short positions and other derivatives. Ultimately, the goal of this approach is to outperform a market index.
Actively managed funds offer individuals the opportunity to select investments with higher, or lower, risk than the overall market. These funds also allow the investor to execute a strategy that underweights or over-weights a certain industry or sector of the economy. Investors that seek out actively managed funds oftentimes do not have faith in the efficient market hypothesis, since they believe it's possible to outperform the market.
Related Terms
- The term passive management refers to a portfolio manager that makes investments in an attempt to replicate the returns of a benchmark index. Passive managers do not use research reports when making investment decisions, they follow a pre-defined strategy that involves keeping the fund's assets in-line with the index they are mirroring.
Moneyzine EditorSeptember 20th, 2023 
The term active return refers to the gain or loss on an investment portfolio as a result of active management decisions. A fund's active return is the percentage gain or loss relative to a benchmark index.Moneyzine EditorJanuary 4th, 2024- The term tracking error refers to a measure that allows an investor to understand how close a fund follows its benchmark index. Tracking error is the standard deviation of the difference between the return of a mutual fund, or exchange traded fund, and its benchmark index.Moneyzine EditorSeptember 21st, 2023
