Active Share: Fuzzy numbers, and how to game the calc

heezsafe

“Active share” has gained increasing visibility among investment managers, consultants, and clients since the concept was introduced in 2006 by Martijn Cremers and Antti Petajisto (both at Yale School of Management’s International Center for Finance) in their white paper “How Active Is Your Fund Manager? A New Measure That Predicts Performance.” Active share’s popularity has largely been driven by two factors. First, it appears simple and intuitive; active share is the proportion of a portfolio’s holdings that is different from the benchmark for that portfolio. (Thus, a portfolio that has perfectly matched its benchmark composition has an active share of zero, and one that has no holdings in common with its benchmark has an active share of 100.) Second, the investment industry has become fascinated by the debate over the link between the level of active share and outperformance of the benchmark.

https://blogs.cfainstitute.org/investor/2016/04/26/active-share-is-a-fuzzy-number/

Currently, there is no standardized approach (or "code of conduct") for calculating active share, and there are several ways that active share calculations could be gamed. Some European regulators are giving it a closer look, apparently because investment fund fees are higher there than in the US and the active share stat is often used to justify them. So far, discussions have identified four aspects of the active share calculation that could be manipulated, where grey areas of interpretation are possibly "advantageous": (1) different securities from the same issuer, (2) disguised underlying exposure, (3) inclusion/exclusion of cash position, (4) use of inappropriate benchmark.