Active Share Measure
Active Share Measure — Deviation from benchmark holdings as active risk proxy.
Definition
Active Share measures how different a portfolio’s holdings are from its benchmark. Cremers and Petajisto define it as half the sum of absolute active weights: Active Share = ½ Σ |w_p − w_b|. Exact index replication is 0%; a book with no overlap approaches 100%. It is a holdings-based active-risk proxy, not a return-based alpha score.
Why it matters
It separates true active management from closet indexing. High fees with low Active Share is an agency failure: clients pay active prices for near-passive holdings. Used with tracking error, it shows whether differentiation is concentrated bets, factor tilts, or noise.
Case
A large-cap “stock-picker” advertising skill but running Active Share near 20–30% is mostly hugging the index. In a style rotation its tracking error may stay low while fee-adjusted alpha capacity is negligible — the allocation bought packaging, not differentiation.
How to read it
Pair Active Share with tracking error, factor exposures, capacity, and fee load. High Active Share alone is not skill (it can be reckless concentration). Low Active Share with high fees is the red flag. Re-check after benchmark or universe changes before trusting a time series.