
Batting Average
An investment manager's "batting average" is a statistical technique used to measure a manager's ability to meet or beat an index. In general, for investment managers to be deemed successful, they would need to achieve a minimum threshold batting average of 50%. The information ratio (IR) is a similar measure of a money manager's success that measures portfolio returns beyond the returns of the benchmark compared to the volatility of those returns. One disadvantage of relying on batting average is that it focuses only on returns and does not take into consideration the level of risk taken by a manager to achieve those returns. An investment manager who outperforms the market in 15 out of a possible 30 days would have a statistical batting average of 50%. A batting average is calculated by dividing the number of days (or months, quarters, etc.) in which the manager beats or matches the index by the total number of days (or months, quarters, etc.) in the period of question and multiplying that factor by 100. The higher the batting average, the better. In investing, batting average refers to a statistical method used to measure an investment manager's ability to meet or beat the returns of a benchmark index. The IR not only measures the investment manager's ability to generate high returns relative to the benchmark but it also endeavors to identify the manager's performance consistency.

What Is Batting Average?
An investment manager's "batting average" is a statistical technique used to measure a manager's ability to meet or beat an index. A batting average is calculated by dividing the number of days (or months, quarters, etc.) in which the manager beats or matches the index by the total number of days (or months, quarters, etc.) in the period of question and multiplying that factor by 100.
The higher the batting average, the better. The highest number possible average would be 100%, meaning the manager outperformed the benchmark every single period. In contrast, a batting average of 0% means the manager never once outperformed their benchmark.




Understanding the Batting Average
An investment manager who outperforms the market in 15 out of a possible 30 days would have a statistical batting average of 50%. The longer the period taken in the sample size, the more statistically significant the measure becomes. Many analysts use this simple calculation in their broader assessments of individual investment managers.
The term originates from baseball, where the batting average represents the percentage of a player's hits to at bats. While a season batting average of .300 (30%) or higher is considered an excellent achievement in baseball, the same cannot be said for investing. A batting average of 50% is used as a minimum threshold for measuring investment success.
Batting Average vs. Information Ratio (IR)
The information ratio (IR) is a similar measure of the success (or failure) of money managers. The IR measures portfolio returns beyond the returns of the benchmark compared to the volatility of those returns. The IR not only measures the investment manager's ability to generate high returns relative to the benchmark but it also endeavors to identify the manager's performance consistency.
The calculation includes a tracking error that shows how consistently the manager is able to achieve portfolio returns that track the index. A low tracking error means the manager consistently beats the index performance, while a high tracking error signals the manager's returns are more volatile and not consistently beating the benchmark.
However, the IR does not easily string together a series of successes or failures, which are helpful when assessing final investment outcomes. The batting average overcomes this shortcoming by answering: Does an investment manager win or lose most investment bets?
The information ratio and the batting average are two commonly quoted measures of investment success, but these measures have shortcomings. The IR contains no information about higher moments, and the batting average contains only directional information.
Limitations of Batting Average
More specifically, the batting average suffers from two primary limitations. First, the batting average focuses only on returns and does not take into consideration the level of risk taken by a manager in achieving returns.
Second, the batting average does not factor in the scale of any potential outperformance. A manager might outperform the benchmark by, say, 0.1% for 10 months, but in the 11th month fall short of the benchmark by 3.50%. In such a case the batting average would be 90.90%, but the manager would have dramatically underperformed their benchmark.
Famed investor Warren Buffet is fond of using baseball analogies when talking about investing and cautions investors not to swing at every pitch (that is, investment), but instead focus on investing within your circle of competence, a concept he first described in his 1996 shareholder letter.
Special Considerations
Over time other baseball references have made their way into the world of investing. In his book, One Up on Wall Street, legendary fund manager Peter Lynch introduces the term tenbagger, which refers to an investment that returns ten times its original purchase price or has the potential to do so. An avid baseball fan, Lynch came up with the phrase because "bag" is baseball slang for "base." To score a tenbagger is like hitting two home runs and a double, or the investing equivalent of racking up a very impressive gain.
Related terms:
Active Risk
Active risk is a type of risk that a fund or managed portfolio creates as it attempts to beat the returns of the benchmark against which it is compared. read more
Investment Analyst
An investment analyst is an expert at evaluating financial information, typically for the purpose of making buy, sell, and hold recommendations for securities. read more
Benchmark
A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. read more
Excess Returns
Excess returns are returns achieved above and beyond the return of a proxy. Excess returns will depend on a designated investment return comparison for analysis. read more
Index
An index measures the performance of a basket of securities intended to replicate a certain area of the market, such as the Standard & Poor's 500. read more
Indexing
Indexing may be a statistical measure for tracking economic data, a methodology for grouping a specific market segment, or an investment management strategy for passive investments. read more
Information Ratio – IR
The information ratio (IR) measures portfolio returns and indicates a portfolio manager's ability to generate excess returns relative to a given benchmark. read more
Investment Manager
An investment manager is a person or organization that makes investments in security portfolios on behalf of clients. read more
Portfolio Management
Portfolio management involves selecting and overseeing a group of investments that meet a client's long-term financial objectives and risk tolerance. read more
Relative Return
Relative return is the return an asset achieves over a period of time compared to a benchmark. read more