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We would like to thank Bernd Brommundt, Michael Genser, Ralf Seiz, Michael Verhofen and Rico von Wyss for helpful comments. We are especially grateful to Nicolas Gisiger for valuable research assistance.Furthermore we would like to thank two anonymous referees for helpful comments.

For investors it is important to know what trading strategies an asset manager pursues to generate excess returns. In this paper, we propose an alternative approach for analyzing trading strategies used in active investing. We use tracking error variance (TEV) as a measure of activity and introduce two decompositions of TEV for identifying different investment strategies. To demonstrate how a tracking error variance decomposition can add information, a simulation study testing the performance of different methods for strategy analysis is conducted. In particular, when investment strategies contain random components, TEV decomposition is found to deliver important additional information that traditional return decomposition methods are unable to uncover.