Abstract
Success in the future means practicing safe, smart stock selection for a manager and safe, smart manager selection for a plan sponsor. Both need to begin with a clear idea of what beta is and what alpha is in the total portfolio; they involve very different expectations and very different risks and should be managed differently. Modern active portfolio or fund management must occur in the space of alpha versus active risk on the active efficient frontier. Successful active managers of the future, the ones the chief investment officer will want to pick, will have skill in forecasting alpha, will optimize their portfolios on the active efficient frontier, will be moving away from using the long-only constraint, and will have high breadth, good portfolio construction processes, low transaction costs, and stringent risk controls.
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