We’ve been hearing a great deal lately about active share. In fact, it was introduced back in 2006 by Martijn Cremers and Antti Petajisto of the Yale School of Management. So what exactly is it? Here’s Nick Motson from Cass Business School.
“Effectively what they’re saying is, I have a benchmark, and I’m going to measure how different my holdings are from that benchmark. So what I’m going to do for each stock that is in the benchmark, I’m going to take the difference between my holding and the benchmark holding. And I’m going to take the absolute value of that, so if I’m above or below I’m going to take it as a positive number. I’m going to add them all together and divide by two. And by construction I can be anywhere between 0 – so if I have exactly the same holdings as the benchmark my active share is 0 – or if I hold nothing that’s in the benchmark and all sorts of other stuff, it will be 100%. And I’ll be somewhere between. It’s a measure of how much I’ve deviated from the benchmark.”
What Is Active Share And Why Is It Important?