Information ratio use in individual portfolio

“…The expected information ratio becomes the single best criterion for constructing an actively managed portfolio, and the ex post information ratio is the best criterion for evaluating the past performance of various actively managed funds.” p. 459 2017 Level II Volume 6

As an individual investor uninterested in individual equity analysis, why wouldn’t I take the simple investing approach below?

  1. Screen for the fund with the highest Information Ratio

  2. Check out the chart to make sure it’s not too hot

  3. Check out the fees to make sure they’re not too high (although perhaps the fees are even included in the active return numerator)

  4. Invest or move on to the next fund with next highest Information Ratio

Past performance is not necessarily indicative of future results… that’s one reason maybe.

Though not directly related to your post concerning the IR, here’s a good paper on taking a quantitative approach to manager selection: A Quantitative Framework for Hedge Fund Manager Selection

Thank you for sharing. I will ensure to study after Saturday.

I feel like past performance is as good of a predictor of future performance as anything else…

I think it might have some forecasting power (that is, you’d likely want to screen for managers who have a decent historical track record as opposed to those with a limited and/or poor historical record) but it definitely is only the start of what should be a long quantitative and qualitative due diligence process in my opinion.

Best of luck to you (us) this Saturday :slight_smile:

Yessir best of luck to you as well.