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The Active Manager's Conundrum Why do relative and absolute performance tend to come at different times?
BY Fei Mei Chan

EXECUTIVE SUMMARY



• Below-average market volatility is typically associated with above-average returns. Given a choice, therefore, most investors would prefer low volatility to high.



• For active managers, however, the choice is less obvious: lower market volatility is associated with lower correlation and lower dispersion, both of which make active management harder to justify.



• Active portfolios are typically more volatile than their benchmarks; how much more volatile depends in part on correlations. Active managers pay an implicit cost of concentration, which rises when correlations decline.



• Low dispersion makes it harder for active managers to add value, and reduces the incremental return of those who do.



• These perspectives highlight the conflict between the goals of absolute and relative return generation.

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