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- Title
The Better-of-Two Strategy for Active versus Passive Management: The Option Value of Active through Time.
- Authors
Fox, Steve; Hammond, P. Brett
- Abstract
Instead of forcing a choice between active and passive portfolios, we create a better-of-two option to (1) calculate active management's value and (2) find the optimal weights for an active-plus-passive portfolio that dynamically replicates this option through time. To replicate the option at a 10-year horizon, the strategy initially allocates roughly 60% to the active asset. Using historical returns and 60/40 portfolios, we found that the ending wealth distributions in excess of the all-passive portfolio that uses the better-of-two strategy significantly exceeded those of an all-active strategy with superior downside protection. Investors could implement this strategy with institutional or individual separate accounts, institutional funds, or a single fund with passive and active subportfolios.
- Publication
Journal of Portfolio Management, 2022, Vol 48, Issue 3, p63
- ISSN
0095-4918
- Publication type
Academic Journal
- DOI
10.3905/jpm.2021.1.314