Information ratio - fund manager

CFA Level II
#1

Is it common or popular to choose fund manger via their Information ratio? What kind of level is good? Above 1?

If my understanding is right, investor will choose the fund manager with highest IR regardless of their risk aversion.

#2

I work for an investment manager and we never use the term (Information Ratio). Perhaps it will be more prevalent in years to come.

That being said, I think it is great if we establish a way of rating investment managers. However, once you start promoting those types of statistics, advisors will be gaming the ratio which will lead to more guidelines and requirements around it (never ending cycle).

#3

I’d never heard of it either. It’s a pretty strange topic area, I hope there isn’t a whole item set based on it.

#4

I have doubts wit this, IR = active return / act risk

The higher seems the better, but what confuses me is the weight giving mechanism

Many of my questiosn might be wrong:

If IR of A is 1 and IR of B is 2 then will give 1/3 and 2/3 weghts to them or will we take only B?

Is there any mechanism on how to calculate the IR of portfolio which has both active and index?

What should we do about benchmarking active portfolio in order to give rank or weights?

#5

Is there any mechanism on how to calculate the IR of portfolio which has both active and index?

I believe IR is zero for index))), makes sense or?

#6

Bang on. That is the final conclusion of the chapter.

#7

asset managers and portfolio managers do use this stat as well as IR Beta Adjusted. it’s most meaningful to see it graphed over time (annualized, rolling 1 year, rolling 3 years) and you want to see that you are consistently generating excess returns: large & positive over consecutive quarters. you can be beating the benchmark but still have negative IR when beta adjusted, meaning you arent getting the returns you need for the risky bets you are making, beta is going up but your alpha is declining… then you know you need to take a look at what bets you took relative to the benchmark that arent paying off… (attribution analysis… not part of the curriculum I dont think!)