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Active Premium

Active Premium

active premium

Active Premium Definition

The Active Premium is a measure of an investments annualized return minus the appropriate benchmark's annualized return.

Active Premium Example

If your All Cap Growth equities manager returned 19% to date benchmarked against the S&P 500's return of 5% than the active premium would be 14%. If you chose a more institutional benchmark such as the Russel 3000 which say had gained 8% YTD than the active premium would be just 11%.

Managers are largely able to choose their respective benchmarks for themselves so it is important to understand the differences between them and note when they are different while comparing two very similar strategies.

Read dozens of additional articles like this within the guide to Hedge Fund Terms.

- Richard

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David Harper said...

It seems like a lot of the academic work going on relates to finding the right benchmark; i.e., a benchmark that incorporates beta factors, style factors, etc. This is alpha/beta problem. If the index represents beta (i.e., return due to passive exposure), then the rest is alpha. Unless the alpha gives the manager credit for merely taking on "hidden" exposures...cheers!

Richard Wilson said...

I agree. This comes up in industry conferences and discussions around building new investment products. Many retail-oriented products should probably bench against the Russel 2,000 or Russel 3000 but many end clients and advisors like to see everything compared to the S&P 500. Sometimes the benchmark seems to be adapted more to the audience than the product at hand.

I would like to learn more about hidden exposures and what typical ones long or long/short managers are taking on.

David Harper said...


Agreed, I guess if S&P500 is still used to benchmark broader equity-based products, from an audience perspective, HF indices are even tougher.

Andrew Lo has done great work, he shows up today, sort of related, on 130/30, thought you'd find interesting:

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