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Breaking Active Share

Breaking Active Share

Every metric is designed to break down, unless it’s a complex metric. Active share, a metric pioneered by Martijn Cremers and Antti Petajisto, is widely regarded as a hallmark of evaluating active management. The metric quantifies the proportion of a portfolio's holdings that differs from its benchmark index. It serves as a key indicator of how actively managed a portfolio is, with higher active share values indicating greater deviation from the benchmark. If you have high active share you are an active manager, if you are low active share, your process is passive. And if your process is passive, you are merely replicating the benchmark, you are not designed to deliver alpha.

Paradox of Mediocrity

Paradox of Mediocrity

In the world of investment management, there's a widespread problem of mediocre results. This isn't because passive investment strategies are brilliant, but rather because the academic understanding of a statistical concept called "mean reversion" has been distorted. Some psychologists and economists have won Nobel prizes by misusing the concept in their theories, which has led to a mistaken belief that active investment managers are generally incompetent.