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# Up-Market Capture Ratio: Understanding and Calculation

## What Is the Up-Market Capture Ratio?

The up-market capture ratio is the statistical measure of an investment manager's overall performance in up-markets. It is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen.

The up-market capture ratio can be compared with the down-market capture ratio. In practice, both measures are used in tandem.

### Key Takeaways

• The up-market capture ratio measures an investment manager's relative performance during bull markets.
• The ratio is calculated by comparing the manager's returns in up-markets with that of a benchmark index.
• Investors and analysts should consider both the up- and down-market capture ratios together to understand a manager's overall performance.

## Calculating the Up-Market Capture Ratio

The up-market capture ratio is calculated by dividing the manager's returns by the returns of the index during the up-market and multiplying that factor by 100.

\begin{aligned}&\frac{\text{Up}}{\text{Down}}\ - \ \text{MCR}\ = \ \frac{\text{MR}}{\text{IR}}\ \times\ 100\\&\textbf{where:}\\&\text{MCR}=\text{market capture ratio}\\&\text{MR}=\text{manager's returns}\\&\text{IR}=\text{index returns}\end{aligned}

## Understanding the Up-Market Capture Ratio

An investment manager who has an up-market ratio greater than 100 has outperformed the index during the up-market. For example, an up-market capture ratio of 120 indicates that the manager outperformed the market by 20% during the specified period. Many analysts use this simple calculation in their broader assessments of individual investment managers.

If an investment mandate calls for an investment manager to meet or exceed a benchmark index’s rate of return, the up-market capture ratio is helpful for spotting those managers who are doing so. This is important to investors who use an active investment strategy and consider relative returns, rather than absolute returns (as hedge funds often seek).

## Special Considerations

The up-market capture ratio is just one of many indicators used by analysts to find good money managers. Because the ratio focuses on upside movements and doesn’t account for downside (losses) moves, some critics offer compelling evidence that it encourages managers to “shoot for the moon.” But when combined with complementary performance indicators, the up-market capture ratio does present valuable investment insight.

When evaluating an investment manager, it is best to consider the down-market capture ratio, too. This ratio is calculated in the same way except using down-market returns. Once both measures are known, a comparison may reveal that a manager with a large down-market ratio or poor up-market ratio still outperforms the market.

The market capture ratios of passive index funds should be very close to 100%.

## Example of How to Use the Up-Market Capture Ratio

If the down-market ratio is 110 but the up-market ratio is 140, then the manager has been able to compensate for the poor down-market performance with strong up-market performance.

You can quantify this by dividing the up-market ratio by the down-market ratio to get the overall capture ratio. In our example, dividing 140 by 110 gives an overall capture ratio of 1.27, indicating the up-market performance more than offsets the down-market performance.

The same is true if the manager performs better in down-markets than up-markets. If the up-market ratio is only 90 but the down-market ratio is 70, then the overall capture ratio is 1.29, indicating that the manager is outperforming the market overall.

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