Manager Risk
The risk that an active fund manager's investment decisions result in underperformance relative to the benchmark.
What is Manager Risk?
Manager risk (also called selection risk or active management risk) is the possibility that the specific decisions made by an active portfolio manager — including stock selection, sector allocation, timing, and position sizing — produce returns that lag the benchmark or peer group. It is the human element of active management risk, distinct from the market risk shared by all investors in the same asset class. Manager risk includes key-person risk (overdependence on a star manager who may leave), style drift (departing from the stated investment process), capacity constraints (a strategy that works at small scale may fail with large AUM), and behavioral biases. Unlike systematic market risk, manager risk is an idiosyncratic, avoidable risk: investors can eliminate it by choosing passive index funds, though they also forgo the possibility of outperformance. Due diligence, manager diversification (using multiple managers with different styles), and clear investment mandates mitigate manager risk.
Example
An investor allocated 100% of a retirement portfolio to a single actively managed fund. The fund's star manager departs; performance deteriorates as the replacement pursues a different strategy. The investor experiences both key-person risk and style drift — avoidable risks that a passive S&P 500 index fund would have entirely eliminated.