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DEFINITION of 'Return Over Maximum Drawdown (RoMaD)'

Return over Maximum Drawdown (RoMaD) is a risk-adjusted return metric used as an alternative to the Sharpe Ratio or Sortino Ratio, used mainly when analyzing hedge funds. It can be expressed as:

RoMaD = Portfolio Return / Max. Drawdown

BREAKING DOWN 'Return Over Maximum Drawdown (RoMaD)'

Drawdown is the difference between a portfolio’s point of maximum return (the “high-water” mark), and any subsequent low point of performance. Maximum drawdown is the largest difference between a high-water and a low. Maximum drawdown is becoming the preferred way of expressing the risk of a hedge fund portfolio for investors who believe that observed loss patterns over longer periods of time are the best available proxy for actual exposure and that hedge fund performance does not follow a normal distribution of returns. If the maximum achieved value for a portfolio to-date was $1,000 and the subsequent minimum level was $900, the maximum drawdown is 10% = [($1000 − $900) / $1000].

Return over maximum drawdown is the average return in a given period for a portfolio, expressed as a proportion of the maximum drawdown level. It enables investors to ask the question: are they willing to accept an occasional drawdown of X% in order to generate an average return of Y%?

An investment with a max. drawdown of 20% and return = 10% (RoMAD = 0.5) would be considered the more attractive investment than one with a max. drawdown of 40% and a return of 10% (RoMAD = 0.25).

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