When Tracking Error Fails to Measure Risk

02.01.2012

Most of the asset management industry uses tracking error, or a measure of how closely a portfolio follows a benchmark or index, as a measure of risk. At Vontobel we don’t think it’s a useful metric. While risk control is a cornerstone of our investment approach, we are more concerned with absolute risk than tracking error. Imposing tracking error limits would dilute the benefits of the strategy we have successfully employed.