The Information Ratio: Measuring Manager Skill Beyond Luck

Why Measuring Skill Matters More Than Measuring Returns

Investment returns alone do not reveal whether performance is driven by skill or chance. For family offices focused on long-term capital preservation, understanding the quality of returns is as important as the magnitude.

The Information Ratio (IR) provides a framework for evaluating whether excess returns are consistently generated relative to a benchmark.

Understanding the Information Ratio

The Information Ratio measures active return divided by tracking error. It evaluates how efficiently a manager converts risk taken relative to a benchmark into excess return.

A higher Information Ratio suggests that excess returns are generated with consistency rather than randomness.

Skill Versus Noise in Portfolio Management

Markets contain significant noise. Short-term outperformance can result from factor exposure or favourable conditions rather than true skill. The Information Ratio helps distinguish repeatable decision-making from temporary advantage.

Consistent IR over time indicates disciplined portfolio construction and risk management.

Why Family Offices Should Care About the Information Ratio

Family offices operate with long investment horizons and multi-generational objectives. Metrics that isolate skill help assess whether managers are aligned with long-term capital stewardship.

The Information Ratio complements traditional risk-adjusted metrics such as Sharpe and Sortino by focusing on benchmark-relative performance.

Limitations of the Information Ratio

The Information Ratio should not be viewed in isolation. It depends on benchmark selection and may penalize strategies that intentionally diverge from traditional benchmarks.

Understanding the strategy’s objective and risk framework remains essential.

How Systematic Strategies Influence Information Ratios

Systematic, rules-based strategies aim to deliver consistency by reducing behavioural bias. When combined with robust risk controls, these strategies often exhibit more stable Information Ratios over time.

This stability is particularly relevant for family offices seeking transparency and predictability.

Konark’s Perspective

At Konark Asset Management, the focus remains on disciplined processes rather than short-term outcomes. Metrics like the Information Ratio provide insight into how systematically risk is converted into return over full market cycles.

Conclusion

The Information Ratio offers a lens into manager skill beyond luck. For family offices prioritizing long-term preservation and risk-adjusted performance, it remains a valuable component of manager evaluation when used alongside broader qualitative and quantitative analysis.