The volatility of the difference in returns between a fund and its benchmark. Also known as active risk. In the context of passive management (tracker fund), tracking error properly describes how well a fund tracks its benchmark. But in relation to active management it is a misnomer: It describes how far the fund manager has strayed from its benchmark, not an error. The measure is nevertheless useful in performance assessment: the higher the active return (outperformance) in relation to the active risk (tracking error) the better.
