Glossary

Tracking Error (Benchmark Tracking Error)

The standard deviation of the difference between a portfolio's periodic returns and its benchmark's returns, measuring how consistently a manager's performance deviates from the index against which it is evaluated.

Real estate tracking error differs in character from tracking error against a passively replicable public equity index, because the standard institutional real estate benchmarks are themselves composed of a basket of actively managed funds rather than a mechanically weighted set of securities — meaning tracking error against such a benchmark reflects both a manager's deliberate strategy positioning (sector and market overweights, leverage differences) and genuine idiosyncratic, asset-level noise that no manager could fully eliminate. Allocators generally expect low tracking error from a core mandate, where the point of the allocation is diversified, benchmark-like exposure, and are willing to accept — and typically underwrite for — much higher tracking error from a value-add or opportunistic mandate, where above-benchmark dispersion is the explicit objective of paying active management fees and carried interest.