Active Investing - Explained
What is Active Investing?
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Table of ContentsWhat is Active Investing?How Does Active Investing Work?Limitations of Active InvestingAcademic Research on Active Investing
What is Active Investing?
Active investing is an investment technique which involves the investor engaging in ongoing buying and selling. Active investors buy investments and constantly monitor their activity to capitalize on profitable conditions.
Back to:INVESTMENTS & TRADING
How Does Active Investing Work?
Active investing is greatly involved. Unlike passive investors that invest in stock once they believe in its long-term appreciation potential, active investors usually check their stocks' price movements many times each day. Typically, active investors want short-term profits. Smart beta exchange-traded funds are an economical way for investors to capitalize on active investing by thinking of other factors instead of just tracking a benchmark index, like choosing a portfolio solely because of company earnings or some other fundamental approach. Risk management: active investing makes it possible for money managers to modify the portfolios of investors to match the predominant market conditions. For instance, during the 2008 financial crisis peak, investment managers could've improved portfolio exposure to the financial sector in order to reduce the risk of their clients in the market. Short-term opportunities: active investing can be utilized by investors to capitalize on short-term trading opportunities. Traders can utilize swing trading strategies for trading market ranges or for capitalizing on momentum. In swing trading, positions are usually held between 2 and 6 days but might span for up to two weeks. Most times, stock prices oscillate, thus creating various short-term trading opportunities. Outcomes: active investing makes it possible for money managers to meet their clients' specific needs, like providing retirement income, diversification, or a targeted investment return. For example, a hedge fund manager may utilize an active long or short strategy in a bid to deliver an absolute return which isn't comparable to a benchmark or other measure. (For more details, check out the Q&A: What is the difference between relative and absolute return?)
Limitations of Active Investing
Cost: due to the possibility of many transactions, active investing can be expensive. If an investor continuously buys and sells stocks, then commissions may have a major impact on the overall investment return. Investors who decide to invest sigh an active investment manager, like a hedge fund, must pay a management fee, irrespective of how successful the fund is in its performance. Active management fees can have a 0.10%-2% range of assets under management (AUM). Active money managers might also charge a 10%-20% performance fee of the profit they generate. Minimum investment amounts: often times, active funds set minimum investment thresholds for prospective investors. For instance, a hedge fund may need new investors to have a $250,000 starting investment.