The Information Ratio (IR) measures the consistency and efficiency of a portfolio manager's ability to generate Alpha — excess returns relative to a benchmark — relative to the variability of that excess return (called Tracking Error). It is calculated as: IR = Annualised Alpha ÷ Annualised Tracking Error. A higher IR indicates that the manager is generating excess returns in a consistent and reliable manner, rather than through occasional lucky bets. An IR above 0.5 is generally considered good; above 1.0 is exceptional. The Information Ratio is preferred over simple Alpha comparisons because it penalises inconsistency — a manager who generates large Alpha in one year and negative Alpha the next has a lower IR than one generating modest but steady Alpha each year, reflecting that consistency is what investors can actually rely on.
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