[1][2][3] Active investors aim to generate additional returns by buying and selling investments advantageously.
[6] Active investors seek to profit from market inefficiencies by purchasing investments that are undervalued or by selling securities that are overvalued.
Therefore, active investors do not agree with the strong and semi-strong forms of the efficient-market hypothesis (EMH).
In the stronger forms of the EMH, all public information has been incorporated into stock prices, which makes it impossible to outperform.
The persistence analysis calculates the percentage of actively managed funds that have outperformed a passive benchmark in consecutive periods.
[20] Many academic studies have concluded that actively managed US equity funds underperform after fees.
This flexibility has multiple benefits for investors: The most obvious disadvantage of active management is that investment returns may be lower rather than higher.
The higher costs are a result of the resources needed to evaluate investments and determine whether they should be bought or sold.
Through the buying and selling of investments, active managers establish the market prices for securities.
[32] Active management also plays an important role in capital formation, because actively-managed portfolios are the buyers of initial public offerings of securities.