Active management, or active investing, is a strategy employed by fund managers or brokers who trade financial assets based on market conditions, seeking profits whether the market rises or falls. Typically, active managers seek inefficiencies in the market, hoping their portfolios will yield expected returns or surpass specific indices, such as the S&P 500.


For individual investors, active management implies frequent buying and selling of assets, based on perceived advantageous market opportunities. On a broader scale, active management involves a group of managers or brokers striving to profit from trading carefully selected asset groups.


Active management is typically grounded in analytical research and investment decisions. Thus, active managers believe they can beat the market, a notion that contradicts the Efficient Market Hypothesis (EMH). The EMH posits that an asset's current price reflects all available information, implying limited inefficiencies to exploit in the market.


Therefore, the success of active investment strategies largely hinges on the manager's subjective judgment and their ability to accurately forecast market movements. Active managers must closely monitor market trends to enhance the likelihood of profitable trades.


In contrast, passive investment strategies, also known as indexing, involve building a long-term portfolio with infrequent trading. Managers or brokers construct portfolios mirroring an index's performance. Passive management is less susceptible to human error in asset selection, with indexing commonly associated with mutual funds and exchange-traded funds (ETFs).


Given the higher transaction costs and risks associated with active management, its fees are typically much greater than those for passive strategies. Historically, indexing has outperformed active investing, potentially explaining the recent surge of interest in passive management strategies.