Active Management in Trading

Active portfolio management refers to a strategy where the portfolio manager aims to achieve returns higher than a specific benchmark. In this method, decisions about buying, selling, or holding assets are made based on technical analysis, the manager's insights, and financial forecasts. This type of management is generally suitable for investors seeking performance that exceeds market indices.

Active managers strive to make optimal decisions by leveraging analytical tools, quantitative research, and their expertise. Some may rely solely on algorithms or personal analyses, while many prefer a combination of both approaches. In addition to higher returns, they often aim to manage risks, reduce taxes, or adhere to Environmental, Social, and Corporate Governance (ESG) standards.

Active vs. Passive Management
On the other hand, passive management—also known as indexing—focuses on mimicking the performance of one or more market indices, avoiding biases and human errors. Advocates of passive management believe this approach yields better results due to its simplicity and lower risk of human error. Below, we will explore the advantages, disadvantages, and differences between these two management styles.

Active Investment
As the name suggests, active investment involves a hands-on and dynamic approach to capital management. This method requires individuals to capitalize on market fluctuations to achieve above-average returns. Success in this type of investment necessitates access to comprehensive quantitative and qualitative analyses, as well as the expertise of professionals and analysts. Active investors continuously manage their portfolios, leveraging short-term market changes and making decisions with precision and speed.

Passive Investment
Passive investors, instead of focusing on short-term fluctuations, adopt a long-term perspective on their investments. These individuals typically purchase assets and hold them for an extended period without being swayed by market volatility or temptations. A prominent example of this approach is investing in mutual funds, which allows individuals to benefit from the long-term growth and profitability of organizations. This strategy emphasizes stability in decision-making rather than frequent buying and selling.

Stages of Active Management in Trading

Active management in trading involves three main stages: planning, execution, and feedback.

Planning:
During this stage, the investor's goals and constraints are determined, including minimum expected returns, maximum acceptable risk, investment duration, tax considerations, and legal restrictions. Based on this information, an Investment Policy Statement (IPS) is drafted, detailing requirements such as reporting obligations, portfolio rebalancing guidelines, asset allocation, management costs, and trading strategies. The active manager then forecasts the risks and returns of various assets to allocate them according to the IPS.

Execution:
In this stage, the designed portfolio is implemented. Active managers, considering their investment strategies and market expectations, buy and sell securities to create an optimized portfolio that aligns with the investor's risk tolerance.

Feedback:
Here, the portfolio is periodically evaluated and, if necessary, rebalanced according to the IPS. These evaluations ensure that the defined goals are being met, and adjustments are made as needed.

Investment Strategies

Passive Investment:
In this approach, the portfolio is designed to mirror the performance of a market index. Changes in the index composition may lead to portfolio adjustments, but price fluctuations of individual securities do not influence investment decisions.

Active Investment:
In this method, managers continuously analyze the market and adjust the portfolio's asset weights based on changes. Their goal is to achieve returns higher than market benchmarks (alpha).

Semi-Active Investment:
This approach combines elements of both active and passive strategies. It aims to generate higher returns while maintaining close alignment with the index and controlling the risk of deviation.

Advantages of Active Management

Flexibility: Offers a broader selection of assets and strategies.

Higher Return Potential: Investors hope to outperform the market with this method.

Volatility Management: Enables rapid responses to market changes and active risk management.

Alignment with Specific Goals: Allows for strategies tailored to individual investment objectives.

Access to Alternative Assets: Investors can include assets with low correlation to the market (e.g., real estate).

Disadvantages of Active Management

Higher Costs: Active management fees are typically higher due to complex and specialized analyses.

Risk of Poor Decisions: Incorrect decisions may result in losses.

Weaker Long-Term Performance: Some studies suggest actively managed portfolios may underperform passive portfolios in the long term.

Active Management in Cryptocurrency Trading

Investors adopting active management in the cryptocurrency market take a similar approach to active managers in stock markets. They aim to identify optimal entry points, such as the start of an upward trend, and exit points, like the end of a downward trend. These investors use tools such as technical analysis and price pattern evaluation to predict future market behavior.

Today, active management strategies in the cryptocurrency world aim to achieve higher returns compared to benchmarks like Bitcoin or indices such as the Nasdaq Crypto Index, which includes the top eight cryptocurrencies.

Active vs. Passive Investment: Choose or Combine?

Many experts believe that combining active and passive investment strategies can be an ideal solution to significantly reduce risk. Choosing the right approach depends on the investor's circumstances and objectives.

High-liquidity individuals often benefit from active investment. This method allows them to capitalize on market opportunities and maximize returns from price fluctuations. Conversely, individuals such as retirees seeking stable income and less involvement in market volatility are better suited to passive strategies. This group can opt for assets with long-term growth potential and dividend yields.

Risk Management: A Necessity in Both Approaches

Risk management is critical in investments, especially in volatile markets like Bitcoin and blockchain. Monitoring capital inflows and outflows for specific assets can prevent significant losses in certain situations.

While both approaches have their advocates and critics, for most investors, a combination of active and passive strategies offers a balanced solution with better overall results.