On an individual level, active management is simply the act of buying and selling assets frequently, based on seemingly good market opportunities that arise. On a broader context, however, active management relates to a group of managers or brokers that try to make profits by trading a select group of assets.
Normally, active management is based on analytical research and investment decisions. As such, active managers believe they can somehow outperform the market. This idea goes against the efficient-market hypothesis (EMH), which implies that the current price of an asset already reflects all information available, meaning there aren’t many inefficiencies to be exploited.
Therefore, the success rate of an active investing strategy is heavily dependent on the subjective interpretation of its managers and, thus, on their ability to successfully predict the market. Active managers need to follow the market trends closely, so they can increase their chances of making profitable trades.
Since active management involves more trading costs and risks, it normally has much higher management fees than passive management strategies. Historically, indexing strategies performed better than active investing, which might explain the recent increase in interest in passive management.
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