Tracking Error Volatility Mitigation by Managers of Multiple Mutual Funds

This article explores managers of multiple mutual funds whose positions are diversified so that the tracking error volatility (TEV) across their funds is mitigated and lower than the average TEV of their individual funds, either as an intentional tactic or as an artifact of investment mandates that differ across funds. This article introduces chained TEV, which is the TEV of the average return across the manager's funds, and Manager TEV Mitigation (MTM), which is one minus the ratio of chained TEV to the average TEV of the manager's funds. Evidence is presented that managers that engage in TEV mitigation underperform. Evidence is also presented that relates MTM to risk and fund flows.