The statement made by the fund manager is indeed incorrect. Active management is a complex process that involves a lot of decision-making and strategizing. The ‘right alphas’ refer to the ability to generate excess returns over a benchmark index. However, achieving these ‘right alphas’ is not as easy as it sounds. Most active managers construct portfolios subject to certain constraints. These constraints could be restrictions on short positions, asset coverage, sector exposure, and many others. These constraints are put in place to manage risk and ensure diversification. Therefore, even with the ‘right alphas’, active management is not easy to achieve because of these constraints. The fund manager's statement oversimplifies the process and complexities involved in active management.

Choice B is incorrect. While it’s true that active managers construct portfolios subject to various constraints, these constraints can indeed make the portfolio less efficient. Constraints such as limits on short selling, sector concentration, and tracking error can limit the manager’s ability to fully exploit their alpha predictions.

Choice C is incorrect. The statement is false because active managers do construct portfolios with certain constraints. These constraints could be regulatory or self-imposed and they often make active management more challenging even with the right alphas.

Choice D is incorrect. Although some active managers may avoid taking short positions or limit cash holdings in their portfolio, this does not necessarily make the portfolio more efficient. In fact, these restrictions could potentially limit the manager’s flexibility in responding to market changes and thus reduce efficiency.

Things to Remember

• Active management involves making investment decisions with the goal of generating excess returns over a benchmark index.
• The ‘right alphas’ refer to the ability to consistently generate positive abnormal returns.
• Active management is complex and involves significant decision-making and strategizing.
• Most active managers construct portfolios subject to various constraints (e.g., short position limits, sector exposure, asset coverage, tracking error) to manage risk and ensure diversification.
• These constraints can make it more difficult to achieve the ‘right alphas’, even if the manager has strong predictive ability.
• Constraints can reduce portfolio efficiency by limiting the manager’s ability to fully exploit alpha opportunities.