Tracking Error
Tracking error is the volatility of active return versus a benchmark — how much the book is allowed to be not-the-index.
Definition
Tracking Error refers to how much the book is allowed to be not-the-index. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It shows up in factor research, attribution, and capacity debates — whether a return slice is skill, style, or fee drag. When how much the book is allowed to be not-the-index shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what tracking error is saying. If how much the book is allowed to be not-the-index moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Check definition stability across universes, costs, and regimes before treating a backtest as portable. Prefer a short written null hypothesis for Tracking Error: what would falsify the current reading in the next window?
Ask the macro AI about this object
Opens Copilot with Codex + RAG context, or send the object into Alpha Factory intake.