MAR Ratio

MAR Ratio

A MAR ratio is a measurement of returns adjusted for risk that can be used to compare the performance of commodity trading advisors, hedge funds, and trading strategies. To calculate the MAR ratio, divide the compound annual growth rate (CAGR) of a fund or strategy since inception and then divide by its largest drawdown. Since the MAR ratio looks at performance since inception, one of its drawbacks for comparisons is not taking into consideration the different timeframes funds or strategies have been in existence. This drawback of the MAR ratio is overcome by another performance metric known as the Calmar ratio, which considers compound annual returns and drawdowns for the past 36 months only, rather than since inception. 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. 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.

The MAR ratio is a measurement of performance returns, adjusted for risk.

What Is a MAR Ratio?

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

The MAR ratio gets its name from the Managed Accounts Report newsletter, introduced in 1978 by Leon Rose, a publisher of various financial newsletters who developed this metric.

The MAR ratio is a measurement of performance returns, adjusted for risk.
The performance of commodity trading advisors, hedge funds, and trading strategies can all be compared by using a MAR ratio.
To calculate the MAR ratio, divide the compound annual growth rate (CAGR) of a fund or strategy since inception and then divide by its largest drawdown.
Since the MAR ratio looks at performance since inception, one of its drawbacks for comparisons is not taking into consideration the different timeframes funds or strategies have been in existence.
The Calmar ratio is another ratio that measures the same metrics but instead 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 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.

MAR Ratio vs. Calmar Ratio

But what if Fund B has been in existence for 20 years and Fund A has only been operating for five years? Fund B is likely to have weathered more market cycles by virtue of its longer existence, while Fund A may only have operated in more 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.

This drawback of the MAR ratio is overcome by another performance metric known as the Calmar ratio, which considers compound annual returns and drawdowns for the past 36 months only, rather than since inception.

The MAR ratio and the Calmar ratio result in vastly different numbers given the time period being analyzed. The Calmar ratio is usually a more preferred ratio as it compares apples to apples in terms of timeframe, hence being a more accurate representation of comparing multiple funds or strategies.

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

Related terms:

Compound Annual Growth Rate (CAGR)

The compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending one. read more

Calmar Ratio

The Calmar ratio compares the average annual compounded rate of return and the maximum drawdown risk of commodity trading advisors and hedge funds. read more

Drawdown

A drawdown is a peak-to-trough decline during a specific period for an investment, fund, or trading account. Drawdowns help assess risk, compare investments, and are used to monitor trading performance. read more

Growth Rates

Growth rates are the percentage change of a variable within a specific time. Discover how to calculate growth rates for GDP, companies, and investments. read more

Hedge Fund

A hedge fund is an actively managed investment pool whose managers may use risky or esoteric investment choices in search of outsized returns. read more

Information Ratio – IR

The information ratio (IR) measures portfolio returns and indicates a portfolio manager's ability to generate excess returns relative to a given benchmark. read more

Market Cycles

Market cycles include four phases of market growth and decline, which is driven by business and economic conditions. read more

Rate of Return (RoR)

A rate of return is the gain or loss of an investment over a specified period of time, expressed as a percentage of the investment’s cost. read more

Risk-Adjusted Return

A risk-adjusted return accounts for the riskiness of an investment compared to the risk-free rate of return. read more

Sharpe Ratio

The Sharpe ratio is used to help investors understand the return of an investment compared to its risk. read more