Losing track?

Tracking error is the gold standard of buy-side risk and performance measurement. But are investors short-changing themselves, trading more complex but insightful measures for this simple metric? Naomi Humphries reports

Tracking error – a measure of a fund’s performance relative to a benchmark – is the asset management industry’s standard gauge of portfolio risk and performance. But the market downturn since 2000 has jolted the investment community, and forced it to reassess how it measures the performance of its asset managers. Tracking error, the once unquestioned metric, is increasingly seen as only one of a handful of essential tools, including stress testing and risk and return decomposition analysis