Calmar Ratio

The Calmar Ratio is a financial metric used to evaluate the performance of an investment fund or portfolio by comparing its average annual return to its maximum drawdown (largest peak-to-trough decline). The ratio helps investors assess the risk-adjusted return of an investment, with a higher Calmar Ratio indicating better risk-adjusted performance. It is commonly used to evaluate hedge funds, mutual funds, and other investment products where minimizing large losses is crucial.

Example

A hedge fund with an average annual return of 10% and a maximum drawdown of 5% over the same period would have a Calmar Ratio of 2, indicating strong risk-adjusted performance.

Key points

• The Calmar Ratio compares the average annual return of an investment to its maximum drawdown.

• A higher Calmar Ratio suggests better risk-adjusted returns.

• Commonly used to assess the performance of hedge funds and investment portfolios.

Quick Answers to Curious Questions

What does the Calmar Ratio measure?

It measures an investment’s risk-adjusted return by comparing its average annual return to its maximum drawdown, indicating how well it performs relative to its worst losses.

Why is a higher Calmar Ratio considered better?

A higher ratio indicates that the investment generates more return for each unit of risk, as it avoids large drawdowns while maintaining strong performance.

How is the Calmar Ratio useful to investors?

It helps investors assess the risk and reward of an investment by considering both returns and potential losses, making it useful for evaluating funds and portfolios.