Abstract Active management combines art and engineering. The art involves finding valuable information about future returns. The engineering involves efficiently capturing that information in superior portfolios. By assuming that it is possible to find such valuable information, we can derive many important insights into the engineering of this process. These insights include Active management is forecasting.
Information ratios determine value-added.
Information ratios depend on skill and breadth. Alphas must control for expectations, skill, and volatility. Why datamining is easy, and guidelines to avoid it. Implementation subtracts value. Distinguishing skill from luck is difficult.