I guess I am not really looking for an answer, this is more of a discussion. What is exactly active managment…or what exactly counts as active managment. Doing some problems in past exam, if a manager R^2 is 95% to its style, is that manager passive or active? Thanks
i would use duration as the guiding factor if duration is the same it’s passive or enhanced indexing and if duration is different it’s considered active…
How about equity managment?
If 95% is due to style I would think that he was more enhanced passive as say 95% of return is determined by say the return on the Russell 2000 Value if he was a SC Value manager…Don’t worry the Regression stuff was probably from the Quant section that no longer exists… Passive: 0% Active return Enhanced: 1-2% Active Return Active: +2% Active Return
^I am not worried about the regression. However, you hit it bigwilly. This is same kind of above, below-average bullsh*t we have to deal with. I remember reading on both Schweser and CFAI that the band of passive to active managment is a continous plot, not discrete.
I understood that there are degrees of active management that depend on the range of decisions that the manager can make, and presumably the instruments they can use. Enhanced indexing, for example, uses some active management in stock or issue selection, but would have to maintain industry and sector weights, and market beta. If you’re doing enhanced indexing, you’d expect that an R^2 would be pretty high, like 0.95. Full active management would allow long and short positions, virtually any weighting, etc… And there’s a range of in-betweens, for example, active management that constrains how far you can deviate from beta, or how much tracking error you can assume. One interesting thing I learned in L3 is that there is a kind of analogy between Beta for equities and Duration for fixed income. Beta is covariance with the market factor, Duration is the price effect of a change in interest rates, and they each perform similar kinds of functions in managing portfolios of equities or FI. In each asset class, general market performance and interest rate levels appear to be the largest determinant of price changes. I find it a little strange to reconcile that with CAPM, which supposes that market performance is the performance of all assets on the planet. If stocks and bonds are only weakly correlated, it seems silly to assume that all major asset classes should boil down to some degree of performance to the world market. Why not just have “world stock market” and “world bond market,” etc. in your model of prices (other than, “oh, this makes it more complicated”).
Quick question…can you have a situation where an active manager doing all kind of active managment (long,short, derviative…ect) and then the regression model indicate a R^2 of 99%? I am just asking…thanks. Proess vs outcome…he can have an active investment process, however, his result is a passive return.
Full active management does NOT allow Long and Short positions, it only allows it if the Mandate allows it. You have many of Long Only funds that are Full Active Management, just wnat to be clear on that.
Sure, a regression in a sense jsut fits numbers into numbers, it doesnt know the portfolio holdings. If for some reason I was full active mgmt but still could only match the index each month it would suggest that my R^2 was 100%. That’s why you have to be careful with Return Based Style analysis as it just fits numbers to numbers…
So, we could have a siuation the active process produce passive return. There will be some challenge for a sponsor to pick a “active”, or “passive” manager.
Well, if the sponsor beleives that the markets are inefficient than they will try to pick a top-quartile active manager to produce returns greater than benchmark, but if they felt markets were efficient they would go with a passive manager or index funds. Active managers “should” produce returns greater than the mkt BUT that is easier said than done as most likely the Average active manager underperforms the mkt.
I guess what I was trying to say was an active manger can be true(active) in its investment process, however, not necessary in its result. If a sponor simply look at the return number, some active manager could be mistaken as passive manager.
Yes, but I would think that would be rare as over the long term it would not hold true.
Thanks
Also, if this guy/gal was supposed to be an active manager and was only return his benchmark, he would likely have been fired and put out of business as why would one pay the extra management fees for an active manager when the same return could be had for less with a passive manager…
^That’s right…forgot that!!!
ws, are you referring to one of the questions in a previous year exam? I remember seeing a question like this before and I got that wrong.
^Exactly!! It was 2005 or 2006…I can’t remember now.