Summary

• Chasing performance by deviating from a benchmark has long been the hallmark of active managers. But it may be time for a rethink.
• Technically defined as the standard deviation of excess returns, TE measures a portfolio’s active return minus the return of its benchmark.
• Not all active risk is created equal—and not all investors seek the same outcome. High TE strategies can play an important role for those pursuing differentiated, style-driven alpha.

By Joshua Lisser and Geoff Tomlinson, CFA

Big benchmark bets can backfire. Lower-risk strategies may better showcase real stock-picking skill.

Chasing performance by deviating from a benchmark has long been the hallmark of active

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