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  • Matthew Levy and Ariel Shlien

Why Active Trading Strategies Can Beat Buy and Hold in Volatile Environments

Updated: Dec 12, 2020

The traditional advice for new retail investors is to pick a slate of blue-chip stocks, or an index fund, buy some shares, and hold them forever. But that advice was not written in the midst of a raging pandemic, widespread unemployment, and the most volatile asset markets in living memory. In this article, we explain why active trading strategies like those employed by hedge funds, funds of funds, family offices, and investment clubs can deliver superior returns in uncertain markets.

What is Active Management

Active Management, Active Portfolio Management, portfolio management strategy

Active management refers to investing where an investment professional, like a hedge fund manager, decides which investments to buy and sell. The first thing to note is that every fund is active to some degree. A top hedge fund or online investment club has a fund manager making those decisions, while an index fund like Vanguard relies on the S&P Investment Committee. Human judgment is always part of the equation.

Why Active Management Does Well

Unlike an index fund, the best hedge funds are able to profit from positive and negative market movement. These hedge fund companies use sophisticated financial instruments, such as options and futures contracts, to bet on extremely specific movements on the prices of individual assets. This is much more precise than simply going long or short the market. The market’s recovery has been highly heterogeneous, with some sectors, like biotech, far outpacing others. Top hedge fund management has been able to exploit that fact.

What’s more, active investors are much nimbler in exploiting market trends than buy-and-hold practitioners. An S&P index fund, for example, wouldn’t have noticed the meteoric rise in technology and telecom stocks brought on by the pandemic. The best investment clubs and global family offices are able to quickly offload positions they think are losers, or dart in and out of churning assets. They also have access to wider lists of alternative investments, including private equity and private equity funds-of-funds, that may not be reflected in index funds or other passive vehicles.

What are the Costs of Buy-and-Hold?

Active investing incurs less of an opportunity cost than its buy-and-hold counterpart. While “don’t buy a stock you wouldn’t own for ten years” works for someone with the liquid wealth of Warren Buffett who gave that advice, most retail investors aren’t prepared to tie up capital for years in the hopes of an eventual return.

Additionally, buy-and-hold can require a large investment. Practicing a buy-and-hold strategy requires hours of detailed research into specific companies, looking at factors such as balance sheets, analysts’ forecasts, SEC filings, and other data. This is because buy-and-hold investors are tied to their companies for a long time horizon, whereas active traders can cut underperforming stocks loose.


While it’s true that passive investing is an easy way to exploit a strong market (i.e., “a rising tide lifts all boats,”) the active strategies of the best investment club networks, hedge fund of funds, and family office wealth management excel at periods of uncertainty. These are times when established wisdom breaks down, and active trading can quickly and accurately exploit frothy market signals. Active traders enjoy a wider menu of assets and alternative investments and have access to more sophisticated data and analysis. They iterate more quickly and react to market sentiment in real time. Which is why active trading can outshine buy and hold during pronounced market volatility.

For more information, contact Ariel Shlien at Surefire Capital:

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