## 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.

### Key Takeaways

- 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.