What are your thoughts on the Information Ratio?

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Aug 26, 2008 11:32 pm


 
I have been attributing more and more weight to the Information Ratio when evaluating funds and managers.  It's a good number to look at when trying to decide if the manager got lucky or actually has skill and can gain alpha for his risk(standard deviation/tracking error).  I like it because it's an equalizing ratio, you can compare IR's with equity fund, bond funds, multi-strategy funds, and individual money managers.  You just have to find the highest R^2 to make it as accurate as possible. 
 
Just wondering what tools/ratio's other people use to compare managers. 
 
 
I know Icecold will love this one.
 
 
Aug 26, 2008 11:48 pm

I prefer Jensen to Sharpe

Aug 27, 2008 6:17 pm

BB are you saying you can use IR to compare an equity manager to a bond manager?  Or am I just reading that wrong?

Aug 27, 2008 7:04 pm
Primo:

BB are you saying you can use IR to compare an equity manager to a bond manager?  Or am I just reading that wrong?

 
Yes, it's really not fair to judge a bond manager vs. equity based on sharpe.  The reason I started really paying more attention to the IR is because our internal Money Management platform uses an information ratio.  After doing some research on it, I found out that you can compare individual money managers to whatever fund platform you are using fairly, using the Information Ratio. 
 
After researching more and back testing the IR it's actually the most accurate thing I have found to judge skill vs. luck.  As long as you keep the R^2 high, in the long run a higher IR will result in better returns.