As a budding investor, there are number of investment strategies you can apply and the strategy you choose will depend on what your investment goals are, time horizon, knowledge of the financial markets and the amount of time and support you have.
Adopting an active investment strategy means you rely on research and if you have deep pockets, a team or professionals who provide information that will allow you to make decisions about the assets you are trading in order to meet your goal of outperforming the market.
Another aspect of Active Investing is investing in a fund. In this situation the Fund manager whose goal is to beat the market will buy shares based on research that suggests the stock price could rise and will sell when the research suggests the price will fall.
We will explore active investing and look into aspects of this strategy and why it may be suitable for you or why you should consider investing in an active fund.
What is Active Investing
When you adopt an active investing strategy you are buying or and selling assets with the aim of making profit to outperform an index or benchmark.
Depending on your region and location where you invest this benchmark or index you are looking to outperform could be the FTSE 100, S&P 500, CAC 40 or any other actively managed Funds where you could otherwise invest.
With an active investing strategy you are monitoring your portfolio constantly against the market to determine any risks to your existing positions so you can hedge them. You are also looking to capitalise on opportunities and the changing investment landscape with the aim of growing your investments and reducing any potential loss.
Why Active Investing
Here are a few reasons why may consider an active investing strategy as opposed to a passive investing strategy.
Knowledge and Interest
If you have an interest in the financial market or in a particular sector such as Technology, it will be easier for you to find opportunities due to your interest and knowledge you have developed in that sector.
For example, you love technology – well, everyone loves technology but you have keen interest in what Tesla is doing. You pay attention to Microsoft and you are looking at the latest products from Google and keeping an eye on Amazon. Because you follow these companies closely you can spot opportunities sooner, understand the businesses better and be able to make investment decisions as a result.
The same can be applied to Bio-tech, Cloud computing or any sectors out there. As you maintain an interest in these companies, you gain knowledge, you see opportunities and you take advantage of them and many time before the rest of the market.
Short to Medium Term Events
A lot can happen in the market in what may seem to be a short space of time and with an active investing strategy, you are constantly on the lookout for events in the market that could work against you and take action such as hedging or closing out your position before any potential losses increases.
Market events can change the direction in which a trade is going either in your favour or against you and even if the reasons are not clear or logical at that point in time, good risk management means you act to reduce your exposure, hedge you position and wait for things to come back to normal.
This could take anything from a few hours to weeks and these market events could be the market reacting to Amazon founder and CEO stepping down, to users on Wallstreet bets taking a position in GameStop and Wallstreet taking the other side of that trade.
Options and Outcomes
An active investing style allows you to tailor your portfolio or investments such that they fulfil a goal for yourself or your clients in the case of a fund manager. Rather than using a particular type of financial instrument, you determine what the goal is and what asset classes and strategy you can apply to reach that goal.
Applying this strategy gives more room for diversification, income from dividends or a particular return. Bonds, Commodities and Forex are a few of the asset classes that can be explored too.
Advantages of Active Investing
Hedging
An Active Investing strategy allows you to make decisions that could change the outcome of the performance of your investments. If you have a financial asset in your portfolio, there could be changes that are political, geographical or man-made that can cause the market to react and one way you can protect yourself is by Hedging.
An active investing strategy gives you the opportunity to react to a changing situation in a manner that will benefit you and your clients. In other situations, active investing managers can use derivatives such as futures or options and trading strategies such as short selling to hedge their positions.
Adaptability
Since you are not restricted to owning a number of Index funds, you have the freedom to explore the market and build your portfolio in such a way that your objectives are met.
For example, you have been following the impact of Covid-19 on commuting and transportation and realised there is an opportunity for a company that will allow people to interact with each other whilst at home – Zoom or any similar companies.
An active strategy means you would have been aware of this situation and invested in Zoom rather than being restricted to a particular fund. An active fund manger in this situation will consider adding Zoom or other relevant asset classes to the fund so investors can benefit from the performance.
Disadvantages of Active Investing
Cost
Here are the most common costs associated with Active Investing.
Research
Research allows you to make decisions with your investments. Now you can do the research yourself (since you have an interest in the companies) but this is not always the case and often times more than not, research will be paid for. Additionally research is time consuming and will distract you from other aspects of managing your portfolio.
It is important to note that the analysts’ predictions are not always accurate after all they are estimates and the market may react in an unexpected way but with passive investment strategies, this would not be something to be concerned with. An active fund manager will carry out his research of pay for the information from companies that do research and sell to clients.
Transaction
Transaction costs are the other type of costs you will need to consider with an active investment strategy. Chances are with flexibility, hedging and dealing with market conditions, you will need to buy or sell more frequently than you would if you adopted a passive strategy.
Each time you buy and sell, your incur transaction costs. This can impact the overall return on your investment. The transaction cost for example can be sending your orders to any third party vendors that allows you to connect to the stock exchange where you order is executed.
If you are in a position to have your money managed by an active investment manager such as a Hedge Fund for example, there are a couple of things to note.
- The active management fees can range from 0.1% to 2% of the Assets Under Management (AUM) which means is that the fund manager will be paid between 0.1% to 2% of the total assets under management and between 10% to 20% of the performance of the fund.
- Additionally many active fund managers fail to beat the market – think about the access they have in terms of research, portfolio managers, etc yet a large amount of them fail to beat the market.
Also note you need to be an accredited investor to invest in Hedge Fund. You need to have an annual income over £100,000 and net assets in excess of £250,000.
Final Note
As we have seen, an Active Investing strategy has some benefits and will work for you if you have a significant amount of money and free time. Having the flexibility to adapt to market conditions is beneficial and being able to protect your position by hedging any risk is an added benefit.
Transactions and Research costs will affect the overall performance of your investment with this strategy and as a large number fund managers fail to beat the market, it is worth considering other options out there.
