Hit ratio measures what percentage of the time your portfolio outperformed its benchmark. It’s like a batting average in baseball - how often do you beat the market?
Beginner
What It Means
Hit ratio is simple: out of all the periods measured, what fraction of the time did your portfolio beat the benchmark?
Portfolio Example
Over 12 months, your portfolio beat the S&P 500 in 8 months and underperformed in 4 months.
Hit Ratio = 8/12 = 67%
You outperformed two-thirds of the time.
Interpretation
| Hit Ratio | Interpretation |
|---|
| 50% | Random / no skill (coin flip) |
| 55-60% | Some consistency |
| 60-65% | Good consistency |
| 65-70% | Very consistent |
| Above 70% | Exceptional (rare) |
Why It Matters
Hit ratio shows consistency. You can have high returns but low hit ratio (few big wins, many small losses) or high hit ratio but moderate returns (many small wins). Both patterns can work, but they feel very different to live through.
Advanced
Mathematical Definition
Hit Ratio = (Periods where Rp > Rb) / Total Periods
Where:
- Rp = Portfolio return in period
- Rb = Benchmark return in period
Hit Ratio vs. Magnitude
Critical Insight: Hit ratio ignores the size of wins and losses.
| Strategy | Hit Ratio | Avg Win | Avg Loss | Net Result |
|---|
| Strategy A | 70% | +0.5% | -1.5% | Negative |
| Strategy B | 40% | +3.0% | -1.0% | Positive |
Strategy Profiles
Different strategies have characteristic hit ratios:
| Strategy Type | Typical Hit Ratio | Profile |
|---|
| Momentum | 45-55% | Few large wins, small losses |
| Mean Reversion | 60-70% | Many small wins, occasional large loss |
| Value | 50-60% | Moderate wins and losses |
| Trend Following | 35-45% | Large wins, many small losses |
High IR can come from:
1. High hit ratio with moderate-sized wins
2. Low hit ratio with very large wins
3. Combination of both
IR ≈ (2 × Hit Ratio - 1) × Win/Loss Magnitude Ratio
Psychological Impact
Hit ratio matters for investor psychology. A strategy with 40% hit ratio may be profitable but feels like constant failure. A 65% hit ratio strategy feels successful even if total returns are similar.
- Low hit ratio strategies are harder to stick with
- Long losing streaks erode confidence
- Investors often abandon good strategies at the worst time
Statistical Significance
Hit ratio estimates require sufficient data:
| Hit Ratio | Periods Needed | For 95% Confidence |
|---|
| 55% | 100+ | Distinguish from random |
| 60% | 50+ | Reasonably confident |
| 70% | 25+ | Clearly non-random |
Short-term hit ratios are noisy. A 70% hit ratio over 10 months could easily be luck. You need years of data for reliable estimates.
Data Requirements
| Requirement | Details |
|---|
| Minimum | 24 months for basic estimate |
| Preferred | 60+ months for stable measurement |
| Consideration | More periods needed when hit ratio is near 50% |
Combining with Other Metrics
| Metric | What It Adds |
|---|
| Gain/Loss Ratio | Average win size / Average loss size |
| Profit Factor | Gross profits / Gross losses |
| Information Ratio | Incorporates both frequency and magnitude |
