returns of the manager's portfolio with those of a benchmark such as the yield on three-month Treasury bills or an equity index such as the S&P 500. Some hedge funds use Information ratio as a metric for calculating a performance fee. Annualized Information ratio The information ratio is often annualized. While it is then common for the numerator to be calculated as the arithmetic difference between the annualized portfolio return and the annualized benchmark return, this is an approximation because the annualization of an arithmetic difference between terms is not the arithmetic difference of the annualized terms. Since the denominator is here taken to be the annualized standard deviation of the arithmetic difference of these series, which is a standard measure of annualized risk, and since the ratio of annualized terms is the annualization of their ratio, the annualized information ratio provides the annualized risk-adjusted active return of the portfolio relative to the benchmark. Criticisms One of the main criticisms of the Information Ratio is that it considers arithmetic returns (rather than geometric returns) and ignores leverage. This can lead to the Information Ratio calculated for a manager being negative when the manager produces alpha to the benchmark and vice versa. A better measure of the alpha produced by the manager is the Geometric Information Ratio. See also Calmar ratio Coefficient of variation Information coefficient Jensen's alpha Modern portfolio theory Omega ratio Outperformance Probability Sharpe ratio Sortino ratio Sterling ratio Treynor ratio Upside potential ratio V2 ratio References Further reading Bacon, "Practical Risk-adjusted Performance Measurement", Wiley, 2012. Bacon, "Practical Portfolio Performance Measurement & Attribution", Wiley, 2008. Financial ratios Investment indicators Statistical ratios