Hi guys,
Is there a relationship between between the manager’s active return and his investment style? My thought was “yes” because of A=P-B, where the benchmark represents the manager’s style. When B increases, the active return decreases. What’s wrong with that? Thanks.
No… you substract B, If you substract something (take it away) it not there, thus not related. By defintion Alpha is skils that is not correlated with bench marks
The only relation i can find between active/passive and style is related to this formula 1 - style fit = % unexplained (RBS) . If style fit was lower than 1, then it can be contributed to active management. So i guess the higher the percentage the more active strategy he used.
There is also this relationship that active return should be uncorrelated with investment style.
I think it’s easier if you guys think of it as TAA and SAA. The managers have a set benchmark/allocation they should be following (IPS). However you allow them to deviate from the allocation if you feel like they have skills. Therefore it’s alpha is his skills to go away from the benchmark, so benchmark shouldn’t affect true Alpha. That stuff about investment style is more like misfit alpha.
Active Return and Style do not have to be correlated. A Manager can beat the benchmark even if style of out of favor.