RISK-ADJUSTED PERFORMANCE EVALUATION OF INVESTMENT PORTFOLIOS USING THE INFORMATION RATIO AND TESTING THEIR EFFICIENCY: AN APPLIED ANALYTICAL STUDY OF A SAMPLE OF INVESTMENT FUNDS LISTED IN SOME GULF COOPERATION COUNCIL COUNTRIES

Abstract

Investment portfolio managers face a continuous trade-off between attempting to generate a large alpha (α) and minimizing tracking error as much as possible, because the golden rule of investment is to generate a return that exceeds the benchmark, which makes the investment portfolio different from its benchmark index and consequently results in tracking error.

Despite the importance of the Information Ratio in evaluating risk-adjusted performance, it has not received widespread attention in the Arab markets under investigation, as these markets are characterized as emerging markets that rely on traditional performance measures that do not meet stakeholders’ expectations. In addition, there is ongoing debate regarding the extent to which the Information Ratio is efficient in providing an accurate assessment of investment portfolio performance, given that it relies on historical data that may not reflect future risk-adjusted performance. Accordingly, this study was conducted to evaluate the performance of investment funds listed in the markets of the Gulf Cooperation Council countries, which, to the best of the researchers’ knowledge, lack such studies. The study used a sample of (30) investment funds over the period from 1/1/2020 to 31/12/2025, based on weekly observations. The Information Ratio was calculated using the one-factor model. To identify the efficiency of the current Information Ratio and its ability to predict future risk-adjusted performance, measured by the subsequent Information Ratio, a simple linear regression model was employed. The research findings revealed weak performance among managers of exchange-traded investment funds in the markets of the Gulf Cooperation Council countries, in addition to the inability to distinguish between managers’ performance resulting from their skills in selecting assets for investment and performance resulting from random behavior or luck. The study also found that the Information Ratio is efficient in predicting future risk-adjusted performance. The researchers sought to provide new empirical evidence from emerging markets in an effort to offer recommendations that may assist investors in determining the usefulness of using the Information Ratio to compare investment funds in which they intend to invest, as well as the authorities responsible for appointing investment fund managers in assessing the possibility of using the Information Ratio as a tool for monitoring and evaluating managers’ performance, considering it one of the fundamental criteria for their appointment and linking it to the compensation they receive.