What Is Batting Average?
The "batting average" of an investment manager is a statistical method which is used to calculate the ability of a manager to reach or exceed an index. A batting average is determined by dividing the number of days (or months, quarters, etc.) for which the manager exceeds or matches the index by the total number of days (or months, quarters, etc.) during the problem span and, then, by multiplying that factor by 100.
The higher the batting average, the better. The highest possible average number will be 100 per cent, for every single cycle, the manager outperformed the benchmark. In comparison, an average batting of 0 per cent means that the manager never even reached his target.
Analysing the Batting Average
An investment manager that outperforms the market within 15 out of a possible 30 days would have an average statistical batting of 50. The longer the time taken in the sample size, the more the test is statistically significant. This primary measure is used by many analysts in their broader evaluations of individual investment managers.
The information ratio (IR) is a similar measure of money managers' success (or failure). However, it does not string together a series of successes or failures easily, which are useful in assessing the outcomes of investment. The batting average overcomes this deficiency by replying: Does an investment manager win or lose most bets?
Limitations of Batting Average
The batting average more precisely suffers from two main drawbacks. First, the batting average focuses solely on returns and does not take into account a manager's level of risk in achieving returns.
Second, the batting average fails to influence the scale of any potential outperformance. A manager could outperform the benchmark by, say, 0.1 per cent for ten months, but by 3.50 per cent in the 11th month.
