Terms

MAR Ratio What it is How it Works Alternatives

MAR Ratio What it is How it Works Alternatives

MAR Ratio: What it is, How it Works, Alternatives

What Is a MAR Ratio?

A MAR ratio is a measurement of risk-adjusted returns used to compare the performance of commodity trading advisors, hedge funds, and trading strategies. It is calculated by dividing the compound annual growth rate (CAGR) of a fund or strategy by its most significant drawdown. The higher the ratio, the better the risk-adjusted returns.

The MAR ratio is named after the Managed Accounts Report newsletter, introduced in 1978 by Leon Rose, a publisher of financial newsletters who developed this metric.

Key Takeaways

  • A MAR ratio is a measurement of performance returns, adjusted for risk.
  • It can be used to compare commodity trading advisors, hedge funds, and trading strategies.
  • To calculate the MAR ratio, divide the compound annual growth rate (CAGR) by the largest drawdown.
  • One drawback of the MAR ratio is that it doesn’t consider the different timeframes funds or strategies have been in existence.
  • The Calmar ratio is another ratio that measures similar metrics but only looks at the past 36 months.

Understanding a MAR Ratio

The compound annual growth rate is the rate of return of an investment from start to finish, with annual returns reinvested. A drawdown of a fund or strategy is its worst performance during a specified time period.

For example, if a fund has a return performance of 2% or more every month in a given year, but experiences a loss of 5% in one month, the 5% would be the drawdown number. The MAR ratio analyzes the worst possible risk (drawdown) of a fund relative to its total growth, providing a standardized metric for performance comparison.

READ MORE  Uncovered Interest Rate Parity UIP Definition and Calculation

For instance, if Fund A has a compound annual growth rate (CAGR) of 30% since inception, with a maximum drawdown of 15%, its MAR ratio is 2. In comparison, Fund B has a CAGR of 35% and a maximum drawdown of 20%, resulting in a MAR ratio of 1.75. Despite Fund B’s higher absolute growth rate, Fund A is considered superior in terms of risk-adjusted returns due to its higher MAR ratio.

MAR Ratio vs. Calmar Ratio

However, the MAR ratio may not accurately compare funds or strategies that have differing timeframes and market conditions. For example, if Fund B has been in existence for 20 years and Fund A for only five years, Fund B is likely to have experienced more market cycles.

To overcome this drawback, the Calmar ratio considers compound annual returns and drawdowns for the past 36 months only, rather than since inception.

The Calmar ratio is generally preferred as it compares funds or strategies over the same timeframe, providing a more accurate representation of performance comparison.

Other popular ratios that compare performance to risk include the Sharpe ratio and the Sortino ratio.

Leave a Reply

Your email address will not be published. Required fields are marked *