Deutsche Asset Management believes alpha over tracking error is a critical way to outline whether or not moves away from the benchmark were justified. The alpha and tracking error pairing, or so-called information ratio, provides a probabilistic insight into the likelihood that a strategy outperforms its benchmark over a given timeframe.
“Our view is that investors should prefer higher information ratios over lower ones in general,” according to the Deutsche strategists. “For an investor who is not constrained by a particular tracking error target, higher alpha-generating strategies even with the same information ratio could be preferred.”
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