The information ratio measures how much return a strategy earns above a benchmark, per unit of risk taken relative to that benchmark.
Information ratio = (portfolio return − benchmark return) ÷ tracking error
Tracking error is the standard deviation of the difference between the portfolio’s returns and the benchmark’s. A high ratio means consistent outperformance; a low one means the excess return is erratic or small.
How it differs from Sharpe
Sharpe measures return above the risk-free rate per unit of total volatility. The information ratio measures return above a chosen benchmark per unit of deviation from it.
The distinction matters when the benchmark itself is volatile. A crypto strategy that returns 40% in a year when BTC returns 60% has a fine Sharpe and a negative information ratio against BTC. It made money and it underperformed the thing it was supposed to beat.
What counts as good
Above 0.5 is respectable for an active manager. Above 1.0 is strong and rare over multi-year periods. Very high figures over short windows usually mean the window is too short.
When to use it
When the question is “did this beat the obvious alternative?” — holding the asset, holding the index, holding the benchmark. For a crypto trading strategy the honest benchmark is usually just holding the coin. A strategy with a positive Sharpe and a negative information ratio against spot is one where you’d have done better doing nothing.