DEFINITION of 'MAR Ratio'

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 inception by its biggest 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 (1925-2013), a publisher of various financial newsletters who developed this metric.

BREAKING DOWN 'MAR Ratio'

The MAR ratio standardizes a metric for performance comparison. For example, if Fund A has registered a compound annual growth rate 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 the higher absolute growth rate, on a risk-adjusted basis, Fund A would be deemed to be superior because of its higher MAR 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.

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