Active management is a style of managing investor funds. It tries to add value to the investment process by trying to beat the market (a benchmark index) with the performance of the funds at hand. The aim is to generate alpha.
Under active management, the fund manager chooses the securities to invest in with the funds, based on their analysis and conviction.
Active management is often discussed in the context of mutual funds (MFs), as fund houses appoint managers to steer the pooled investor money.
Active management requires the fund manager’s active involvement and judgement. The effort to pick securities on behalf of the investors entails a higher fees compared to passive management and higher trading costs.
Information ratio is used to measure active management’s efficiency.