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Ex post reality versus ex ante theory of the fundamental law of active management

Author

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  • David J Buckle

    (Merrill Lynch Investment Managers)

Abstract

The fundamental law of active management provides considerable ex ante aid both to those constructing active management processes and to those estimating the future performance of those processes. Ex post, performance can be quite different to that expected by the law, and the violations of assumptions underlying the law which cause the greatest performance impact are identified. It is shown that biased forecasting in a trending market is the greatest cause for concern. Portfolio construction is also a sensitive input in certain circumstances. The remaining assumptions underlying the law are surprisingly innocuous, and violations have very little impact on performance.

Suggested Citation

  • David J Buckle, 2005. "Ex post reality versus ex ante theory of the fundamental law of active management," Journal of Asset Management, Palgrave Macmillan, vol. 6(1), pages 21-32, June.
    • Handle: RePEc:pal:assmgt:v:6:y:2005:i:1:d:10.1057_palgrave.jam.2240163
    DOI: 10.1057/palgrave.jam.2240163
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    Cited by:

    1. Leigh Sneddon, 2020. "Strategy design and the fallacies of breadth," Journal of Asset Management, Palgrave Macmillan, vol. 21(7), pages 626-635, December.

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