The term active management refers to a portfolio manager that makes investments in an attempt to outperform a benchmark index. Active managers will use research reports, as well as pull from their experiences, when making investment decisions.
When a fund is said to be actively managed, investors can expect the portfolio manager to purchase securities they believe are undervalued, and sell short those they believe are overvalued. Active management is the opposite of passive management, which attempts to minimize the tracking error between a portfolio and a market index such as the S&P 500.
Active managers will use a variety of research reports, including those that examine the fundamental strengths of stocks, in an attempt to identify those securities that are both undervalued as well as overvalued. Actively managed funds may also pursue short positions and other derivatives. Ultimately, the goal of this approach is to outperform a market index.
Actively managed funds offer individuals the opportunity to select investments with higher, or lower, risk than the overall market. These funds also allow the investor to execute a strategy that underweights or over-weights a certain industry or sector of the economy. Investors that seek out actively managed funds oftentimes do not have faith in the efficient market hypothesis, since they believe it's possible to outperform the market.