DEFINITION of 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 outperform their benchmark. Often, a batting average of 50% is used as a minimum threshold for measuring investment success.
BREAKING DOWN 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 information ratio (IR) is a similar measure of success (or failure) of money managers. It, however, does not easily string together a series of success 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, batting average focuses only on returns and does not take into consideration the level of risk taken by a manager in achieving returns. Second, 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 — and now, investors are getting nervous.