Tracking Error - Useful Stat or Innovation Killer?

Posted by Peter Knapp on 5/9/08 12:23 pm

”Tracking error” is defined as the percentage difference in return between a portfolio and the benchmark index it is measured against.  It has been around for over a decade, and was originally designed for use by consultants analyzing managed index funds (passive investment) to measure how good they were at tracking the index they were trying to replicate.  The consultant community, the gatekeepers for institutional investors, gradually expanded the use of tracking error to active managers, like Navellier.  We like the fact that over-reliance on tracking error is coming under greater criticism
as squashing innovation and creativity.  We like it because our products typically have higher tracking error for the right reasons.  Read the full story

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