Active return refers to the return generated by an investment above a benchmark or market index. In finance, it measures the performance of a portfolio or fund as compared to a standard such as the S&P 500 or other relevant indicators. This metric is crucial for assessing the effectiveness of a fund manager’s investment strategy.
The relevance of active return lies in its ability to highlight the skill of the investment manager. A positive active return indicates that the manager has successfully outperformed the benchmark, suggesting effective investment decisions. Conversely, a negative active return reveals underperformance, prompting investors to evaluate the manager’s strategies or consider alternative investments.
Active return is often expressed in percentage terms and can be calculated by subtracting the benchmark return from the investment return. This measurement helps investors gauge potential risks and rewards associated with active management versus passive investment strategies, facilitating informed decision-making in their portfolios.
