Understanding the MAR Ratio: Risk-Adjusted Returns Explained

What Is a MAR Ratio?

The MAR ratio measures risk-adjusted returns by dividing the compound annual growth rate (CAGR) since inception by its largest drawdown. It's commonly used to compare hedge funds, commodity trading advisors, and trading strategies, emphasizing long-term performance. While effective for evaluating consistency and downside risk, it can overlook shorter-term fluctuations, which are better captured by the Calmar ratio.

An In-Depth Look at the MAR Ratio

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

For example, in a given year, say every month a fund had a return performance of 2% or more, but in one month it had a loss of 5%, the 5% would be the drawdown number. The MAR ratio seeks to analyze the worst possible risk (drawdown) of a fund to its total growth. It standardizes a metric for performance comparison.

For example, if Fund A has registered a compound annual growth rate (CAGR) of 30% since inception, and has had a maximum drawdown of 15% in its history, its MAR ratio is 2. If Fund B has a CAGR of 35% and a maximum drawdown of 20%, its MAR ratio is 1.75. While Fund B has a higher absolute growth rate, on a risk-adjusted basis, Fund A would be deemed to be superior because of its higher MAR ratio.

Comparing the MAR Ratio and Calmar Ratio

If Fund B has existed for 20 years and Fund A for only five, Fund B might have faced more market cycles, whereas Fund A may have only seen favorable markets.

This is a key drawback of the MAR ratio since it compares results and drawdowns since inception, which may result in vastly differing periods and market conditions across different funds and strategies.

The Calmar ratio addresses this issue by focusing on compound annual returns and drawdowns over the past 36 months instead of since inception.

The MAR ratio and the Calmar ratio result in vastly different numbers given the time period being analyzed. The Calmar ratio is often preferred because it compares funds or strategies over the same timeframe, providing a more accurate representation.

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

The Bottom Line

The MAR ratio gauges risk-adjusted returns by comparing a fund's CAGR to its maximum drawdown, offering insight into long-term performance. However, it may overlook changing market conditions. Investors often pair it with the Calmar ratio for recent results and use metrics like Sharpe or Sortino for a fuller picture of risk and return.