Analyzing Active Investment Strategies

Posted: 19 Jul 2007  

Manuel Ammann

University of St. Gallen - School of Finance

Stephan Kessler

Universität St. Gallen - Swiss Institute of Banking and Finance

Jürg Tobler

affiliation not provided to SSRN

Abstract

For investors it is important to know what trading strategies an asset manager pursues to generate excess returns. In this paper, we propose an alternative approach for analyzing trading strategies used in active investing. We use tracking error variance (TEV) as a measure of activity and introduce two decompositions of TEV for identifying different investment strategies. To demonstrate how a tracking error variance decomposition can add information, a simulation study testing the performance of different methods for strategy analysis is conducted. In particular, when investment strategies contain random components, TEV decomposition is found to deliver important additional information that traditional return decomposition methods are unable to uncover.

Keywords: tracking error, tracking error variance, decomposition, active investment strategies

JEL Classification: G11

Suggested Citation

Ammann, Manuel and Kessler, Stephan and Tobler, Jürg, Analyzing Active Investment Strategies. Journal of Portfolio Management, Vol. 33, No. 1, pp. 56-67, 2006. Available at SSRN: https://ssrn.com/abstract=1000168

Manuel Ammann (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Stephan Kessler

Universität St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstr. 52
CH-9000 St.Gallen
Switzerland

Jürg Tobler

affiliation not provided to SSRN ( email )

No Address Available

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