What Tracking Error measures
Tracking Error is one of the metrics we use to evaluate aPMS scheme. It helps quantify a specific dimension of performance, risk, consistency, or implementation quality.
**Best for:**Understanding how tightly a scheme follows or deviates from its benchmark.
Why it matters for PMS scheme evaluation
- Adds context beyond headline returns by highlighting one key dimension of scheme behavior.
- Improves comparability across schemes when used within the same strategy and benchmark context.
- Becomes most useful when combined with other metrics (especially drawdowns and risk-adjusted measures).
How to interpret Tracking Error
Use the Tracking Error Calculator tool
Compare PMS schemes using this and other metrics
- **Compare like-for-like:**use peer schemes with similar strategy and benchmark.
- **Check multiple horizons:**avoid a single time window (for example 1Y vs 3Y vs 5Y).
- **Use a cluster:**pair withMax DrawdownandVolatilityto understand trade-offs.
Common pitfalls
Read our methodologyfor calculation assumptions and limitations.
- Low tracking error can imply closet indexing; high tracking error can imply concentrated bets.
- Short track records can make this metric unstable; prefer longer histories where possible.
- Calculation choices can shift values—compare schemes using consistent assumptions.
Related metrics
FAQs
Tracking Error is a metric used to evaluate PMS scheme behavior. In simple terms, it helps quantify: volatility of active returns vs benchmark; measures active risk.
Not always. Higher values can come with trade-offs. Interpret Tracking Error alongside drawdowns, volatility, and strategy context.
Compare within similar peer groups and across multiple horizons. Use Tracking Error as part of a metric cluster, not a single-number decision.
What is Tracking Error in a PMS scheme?
Tracking Error is a metric used to evaluate PMS scheme behavior. In simple terms, it helps quantify: volatility of active returns vs benchmark; measures active risk.
Is a higher Tracking Error always better?
Not always. Higher values can come with trade-offs. Interpret Tracking Error alongside drawdowns, volatility, and strategy context.
How should I use Tracking Error to compare schemes?
Compare within similar peer groups and across multiple horizons. Use Tracking Error as part of a metric cluster, not a single-number decision.
Next:How to compare PMS schemes·How to evaluate a PMS scheme·All metrics