Analyzing Active Investment Strategies

Abstract

Investors want to know the trading strategies an asset manager pursues to generate excess returns. Tracking error variance can be an alternative approach for analyzing the trading strategies used in active investing. Two decompositions of TEV may be used as a measure of activity in identifying different investment strategies. A simulation study testing the performance of different methods of strategy analysis demonstrates how a TEV decomposition can add information. When investment strategies involve random components, TEV decomposition delivers important additional information that traditional return decomposition methods cannot uncover.