Active Share¶
One-line definition¶
Half the sum of absolute active weights across all holdings — the fraction of the portfolio, by market value, positioned differently from the benchmark.
Formula¶
active_share = 0.5 * sum(|w_portfolio_i - w_benchmark_i|)
Why PMs care¶
It's the standard answer to "how much of a stock-picker is this manager, versus a closet indexer" — a fund with 98% overlap to its benchmark can't generate much alpha no matter how skilled the manager is, since so little of the portfolio differs from the free benchmark return.
Worked example¶
Portfolio 60% US equity / 40% international equity against a 50/50
benchmark — the same example as
benchmark basics. Active weights are +10%/-10%,
so active_share = 0.5*(0.10 + 0.10) = 0.10: 10% of the portfolio is
actively positioned.
Common mistakes¶
- confusing active share (a positioning measure) with tracking error (a realized/predicted risk measure, tracking error) — two large but offsetting bets can produce high active share with low tracking error if they cancel risk, and vice versa
- computing it at the sector level instead of individual holdings, which understates it
Limitations¶
A pure positioning metric — it says nothing about whether the active bets are good ones, only how large they are.