Information Ratio
The information ratio is active return over active risk — residual performance per unit of tracking error versus a benchmark.
Definition
Information Ratio refers to residual performance per unit of tracking error versus a benchmark. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It shows up in factor research, attribution, and capacity debates — whether a return slice is skill, style, or fee drag. When residual performance per unit of tracking error versus a benchmark shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what information ratio is saying. If residual performance per unit of tracking error versus a benchmark moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Check definition stability across universes, costs, and regimes before treating a backtest as portable. Prefer a short written null hypothesis for Information Ratio: what would falsify the current reading in the next window?