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Is high active share always good?

Author

Listed:
  • Giuliano De Rossi

    (Macquarie)

  • Gurvinder Brar

    (Macquarie)

Abstract

More and more asset managers are committing to an explicit active share target, which takes the form of a lower bound (e.g. at least 75%) or a range of values (e.g. between 75 and 85%). The active share target is used either in conjunction with, or as a substitute for a tracking error limit. We analyse the implications of active share targets on the portfolio construction process using a simple optimisation framework. Our results suggest, counter to conventional wisdom, that in certain situations the portfolio construction process benefits from imposing a limit on active share rather than from boosting active share. In particular, if the signal used in a strategy is weak, then a constraint on active share can help mitigate the effects of model uncertainty.

Suggested Citation

  • Giuliano De Rossi & Gurvinder Brar, 2018. "Is high active share always good?," Journal of Asset Management, Palgrave Macmillan, vol. 19(7), pages 460-471, December.
    • Handle: RePEc:pal:assmgt:v:19:y:2018:i:7:d:10.1057_s41260-018-0096-5
    DOI: 10.1057/s41260-018-0096-5
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    References listed on IDEAS

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    1. Ravi Jagannathan & Tongshu Ma, 2003. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," Journal of Finance, American Finance Association, vol. 58(4), pages 1651-1683, August.
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    4. Martijn Cremers & Antti Petajisto, 2006. "How Active is Your Fund Manager? A New Measure That Predicts Performance," Yale School of Management Working Papers amz2370, Yale School of Management, revised 01 May 2009.
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