Joel Greenblatt, managing partner of Gotham Asset Management, may have figured out a way to make active strategies appeal to passive investors, according to a recent article in Forbes.

The legendary investor and author of The Little Book that Beats the Market (2010) has started a new fund called the Gotham Index Plus Fund that seeks to bend passive an active management strategies by tracking the S&P 500 and using it, the article says, as an “overlay strategy to build a long/short exposure based on Gotham’s value models.”

The article outlines a recent interview with Greenblatt. Here are some highlights:

On current valuations, Greenblatt says, “we are more expensive than normal,” but argues, “there certainly are stocks we can find that are cheaper than average with good prospects.”

Gotham’s investment style is not factor-based (according to metrics such as price-book or price-sales ratios). He explains, “We want to know over time the kind of cash flows we are going to generate from the business and how cheap it is relative to other companies.” He uses the example of Apple which, for example, generates “lots of cash flow, and we don’t have to pay a big price for it.”

Greenblatt doesn’t envision a change in investor behavior due to stretched valuations and rising rates. Investors, he asserts, “are very emotional over the short term. We try to only be valuation-based so we look to take advantage of those emotions.”

Money continues to pour into index funds, says Greenblatt, because, “just buying an index over the last seven or eight years has been a cheap and great way to make money.” He explains that most investors don’t really understand the process of an active manager, so they “chase returns by gravitating toward anything that has performed well.

“To beat the market,” Greenblatt argues, “you have to do something different from the market. If people just keep looking at the wrong thing, which is trailing returns, they are not going to be able to take advantage of opportunities.”