Dynamic market opportunities and the behaviour of active managers

ABSTRACT

This paper examines the behaviour of active managers during periods of changing market opportunities, defined in terms of a market's cross-correlation and cross-sectional volatility structure. Examining active managers of UK, European and US equities over twenty years, the paper finds that both of these aspects of active management are at least partly determined by the available opportunity set. Overall, top quartile managers do much better, and bottom quartile managers much worse, when the opportunities are higher, and vice-versa when they are lower. Tracking errors are less responsive to opportunities than are active returns, leading to improvements in the information ratios as the opportunity set expands.