When it comes to investing their money for retirement or personal investments, people typically go for either one of two management styles: active or passive. What do these terms refer to and what is the distinction?
As the name suggests, active fund management is an active way to manage funds. More specifically, it involves decision-making by a manager or management team about what stocks to buy and how to allocate to them. In active fund management, research and analysis are used to buy and sell securities. The aim is to eclipse the performance of the index being followed, e.g. S&P 500.
On the other hand, passive fund management is fund management that simply follows a market index. This has become more common because of its low fees. For example, ETF funds managed passively are nothing more than a reflection of the exact construction of stocks or bonds of indexes such as Bloomberg Barclays U.S. Aggregate Bond Index, MSCI International Index, and the S&P 500 index.
A few years ago, if anyone was asked to manage funds, they would use either or both of the two management styles mentioned above. However, another option available to the investor today is Algorithmic Intelligence (AI) funds management. So, which one is the best? Is it active, passive, or AI managed funds? Here is a brief discussion on each to help you decide.
The aim of active funds management is to deploy various techniques that aim to duplicate the performance and outshine a specific index such as the S&P500 Index. There are several benefits of an active approach to funds management including:
Flexibility—It is possible to allocate heavily to certain investments that will potentially outshine the index and limit exposure to investments that will underperform at the same time.
Research—Investments that will maximize returns are found by analyzing individual companies, market sectors, and economic trends
Risk Management/Limiting Losses—several allocations and rule-based techniques can be used to minimize losses and manage perceived risks.
The cons of active fund management include higher costs, which man are becoming more and more scared of. There are also risks of having inconsistent returns based on different individuals managing the fund.
Passive Management is also called index fund management involves management of funds by closely monitoring the benchmark or index of a particular market. The aim of this strategy or management style is to generate a return exactly equal to the index being followed. Unlike active funds management, passive management of funds has no ambition to ‘outshine’ the index.
The pros of passive funds management include lower expenses than active management and consistency of holdings. On the other hand, the cons of this management style include a lack of flexibility in managing funds and returns that follow the market, which means you make money when the market goes up and lose money when it goes down. The majority of individuals use this option.
Algorithmic Intelligence (AI) Funds Management
The third and final way to manage funds is through an Algorithmic Intelligence (AI) trading software. This is a new and innovative solution for managing funds that in the last decade has become commonplace to institutional fund management, private hedge fund managers and professional traders.
AI marries both the qualities of flexibility and the research-based risk control in active funds management, all while maintaining low cost features of passive ETF’s by using a mathematical approach and charging a low flat fee.
iFlip’s AI software is the first AI software that offers a mathematical approach to follow a financial plan. The AI software provides the flexibility, research and risk management on a case by case every day, all in real time. The AI is simple. It runs algorithms and mathematical equations on the open of every market day and analyzes if the software should buy, sell or hold stocks. Based on the result it will automatically execute actions in order to protect and grow the wealth of the investor. This solution doesn’t require the person investing money to do anything. The software takes care of everything for them.
Many have mistaken this software for a robo advisor or trader, however AI is nothing like robo-softwares. Click to see big difference.
With the increasing use of technology in a fast-paced world, the AI method of fund management is certain to become tomorrow’s next class of investment style.
For more information see www.iflipinvest.com.