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“How to Manage Tracking Error with Greater Certainty” - White Paper by Sum, Marmer & Guthrie

Authors:
Alfred Sum, Portfolio Manager & Partner, Hillsdale Investment Management Inc.
Harry Marmer, Executive VP & Partner, Hillsdale Investment Management Inc.
Chris Guthrie, President & CEO, Hillsdale Investment Management Inc.

This paper examines two different techniques a Canadian equity manager can employ to manage tracking error risk. The first approach employs an optimization model where the objective is to control tracking error and to maximize a portfolio’s information ratio, which is an important measure of the portfolio’s risk-adjusted active return. However, using an optimizer to control tracking error is not the ideal solution as it has limited capability in forecasting and effectively managing tracking error. Instead, we employ an intuitive multi-strategy allocation process that manages tracking error with greater certainty providing for superior risk-adjusted returns and consistent attributes. This approach is not only valuable for managers but also for investors as it provides them with a higher degree of confidence in the ability of their manager to achieve their investment objectives.

For a copy of the full paper, please use the “Download White Paper in PDF” link above.