Wednesday, June 4, 2014

Active Share and Tracking Error | Not Mutually Exclusive Decisions

Antti Petajisto got a lot of attention with his research on Active Share and Tracking Error in mutual fund management.  While the research is fairly compelling, there is a missing discussion about a potential relationship between the two measures. The paper seems to suggest that mutual fund managers can independently and intentionally pursue Active Share and/or Tracking Error.  However, some research from the PIMCO Quantitative Team argues that Active Share and Tracking Error are related and that they can easily be a byproduct of other decisions such as benchmark or fund exposure.  I strongly suggest reading both sets of research to gather a full understanding of these concepts.

Table 2 is simple enough, but despite its simplicity I could not visualize in my head, so I copied the data and with a couple lines of R + rCharts got all the visualization I needed.




source code from Github

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