What it means
Returns alone can mislead. Two funds may both grow at 12% a year, but one may have fallen 10% at its worst while the other fell 40%.
The MAR ratio puts that difference into one number so that investors can compare funds on a risk-adjusted basis. The name comes from Managed Account Reports, a publication in the managed futures industry that popularised the measure.
It is closely related to the Calmar ratio, which uses the same idea but traditionally looks at only the last 36 months of performance. In practice, the two terms are sometimes used interchangeably, so it is wise to check the period being used.
The numerator is the compound annual growth rate, or CAGR, which turns a multi-year gain into the steady yearly rate that would have produced the same result. The denominator is the maximum drawdown, which is the largest percentage decline from a previous high to a later low.
Both come straight from a fund's history, so the ratio is easy to compute. Because it focuses on the worst loss, the ratio speaks to how investors actually feel and behave.
A fund with a deep drawdown may force investors to sell at the bottom, so a good headline return can turn into a poor real result. Fund selectors, pension committees and trading firms use MAR to compare strategies with different risk profiles.
The measure has limits. The maximum drawdown depends on a single event, so a short track record may understate what could happen in a worse market.
It also says nothing about how long the recovery took, so the ratio should be read alongside other measures such as volatility and the Sharpe ratio. As a practical tip, always ask how the drawdown was measured.
Daily data usually reveals deeper falls than monthly data, because a bad week can be hidden once it is averaged into a month, and that difference can change the ranking of two funds.
In practice
Real-world examples.
Example
A pension committee compares two trend-following funds. Fund A earned 14% a year but suffered a 35% drawdown, a MAR ratio of 0.4, while Fund B earned 10% with a 12% drawdown, a MAR ratio of about 0.83, so the committee prefers Fund B. It also notes that Fund B's lower worst loss makes it easier to hold through bad periods.
Example
A family office reviews its hedge fund holdings and ranks them by MAR ratio. It decides to reduce its allocation to the fund with the lowest ratio, even though that fund has the highest recent return. The office re-runs the ranking every quarter to see whether the order changes.
Example
A retail investor looks at two managed account programmes advertised on a platform. By computing the MAR ratio from the monthly returns, she sees that the more popular programme had a much larger worst loss than its brochure suggested. She chooses the other programme and checks the calculation against the provider's monthly figures.
Formula
Calculation
MAR ratio = Compound annual growth rate / Maximum drawdown
An investment grows from $100,000 to $157,352 over four years, which is a CAGR of 12% because 1.12 x 1.12 x 1.12 x 1.12 = 1.5735. At its worst, the value fell from a peak of $140,000 to a low of $112,000, a drawdown of ($140,000 - $112,000) / $140,000 = $28,000 / $140,000 = 20%. The MAR ratio is 12% / 20% = 0.6. A second fund with a 9% CAGR and a 10% maximum drawdown has a MAR ratio of 9% / 10% = 0.9, so it delivered more return per unit of worst loss despite a lower headline return.Case study
Seen in the real world.
Summit Ridge Capital is an illustrative, fictional fund that grew at 15% a year over five years, which attracted a flood of new investors. An analyst at an allocator firm asked for the monthly returns and calculated a maximum drawdown of 45% during a market shock in year three.
The MAR ratio was 15% / 45%, or about 0.33, which was far lower than the allocator's threshold of 0.5. The firm declined to invest, even though the headline return looked excellent. A rival allocator accepted the fund on the strength of its three-year return alone.
In this illustrative story, the fund later suffered another large decline and many investors withdrew at a loss. The example shows why a ratio that includes the worst loss can reveal risks that a return figure hides.
Watch out
Common mistakes.
- Comparing MAR ratios calculated over different time periods, when a longer history may include a larger drawdown than a shorter one.
- Treating a single high MAR ratio as proof of skill, when a short track record can look good through luck.
- Confusing the MAR ratio with the Sharpe ratio, when MAR uses maximum drawdown and Sharpe uses volatility.
Questions
People also ask.
What is a good MAR ratio?
Higher is better, and many investors look for figures above 0.5, though acceptable levels depend on the strategy and the period.
How is it different from the Calmar ratio?
The Calmar ratio traditionally uses a three-year window, while MAR typically uses the full history since inception.
Why use drawdown instead of volatility?
Drawdown reflects the actual loss an investor would have experienced, while volatility treats gains and losses alike.
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