What does tracking error indicate in private equity?

Tracking error is a measure used to assess how closely a fund's performance correlates with a benchmark index. Specifically in private equity, it reflects the deviation of a fund's returns from the returns of its designated benchmark. A higher tracking error indicates a larger difference between the fund’s performance and that of the benchmark, which may suggest a higher level of risk or active management. This measure is particularly important in private equity where fund returns can be significantly affected by market conditions, investment choices, and the timing of cash flows. Understanding tracking error helps investors evaluate how well a fund is performing relative to expected benchmarks, allowing them to make informed decisions about their investments.

The other options do not accurately reflect the definition of tracking error. Total assets pertain to the size of the fund rather than its performance against a benchmark. Liquidity status addresses how easily assets can be converted to cash, while projected growth rate involves future expectations rather than past performance metrics. These aspects do not capture the essence of tracking error as it relates specifically to the evaluation of returns against a benchmark.