What Is the Calmar Ratio?
The Calmar ratio is a gauge of the potency of investment price range very similar to hedge price range and commodity purchasing and promoting advisors (CTAs). It is a function of the fund’s average compounded annual rate of return versus its maximum drawdown. The higher the Calmar ratio, the better it performed on a risk-adjusted basis right through the given time frame, which is maximum frequently steadily set at 36 months.
Key Takeaways
- The Calmar ratio is a measure of risk-adjusted returns for investment price range, created by way of fund manager Terry More youthful in 1991.
- The Calmar ratio uses a fund’s maximum drawdown as its sole measure of risk, which makes it unique. This may be considered regarded as certainly one of its weaknesses.
Calmar Ratio History
The Calmar ratio used to be as soon as advanced and offered in 1991 by way of Terry W. More youthful, a California-based fund manager. He argued that the ratio presented a further up-to-date finding out of a fund’s potency than the Sterling or Sharpe ratios, other steadily used gauges, because it used to be as soon as calculated per month while they’ve been completed yearly. The per month exchange moreover made the Calmar ratio smoother than what More youthful referred to as the “just about too subtle” Sterling ratio.
The Calmar ratio is, in truth, a modified fashion of the Sterling ratio. Its determine is an acronym for California Managed Account Studies. More youthful moreover referred to the Calmar ratio since the Drawdown ratio.
The Calmar Ratio’s Strengths and Weaknesses
One power of the Calmar ratio is its use of the maximum drawdown as a measure of risk. For one thing, it’s further understandable than other, further abstract risk gauges, and this makes it preferable for some buyers. In addition to, although it is up-to-the-minute per month, the Calmar ratio’s standard three-year time frame makes it further loyal than other gauges with shorter time frames that could be further affected by natural market volatility.
On the flip facet, the Calmar ratio’s point of interest on drawdown approach it’s view of risk is quite limited compared to other gauges, and it ignores not unusual volatility. This makes it a lot much less statistically necessary and useful.
Nevertheless, the risk-adjusted nature of the Calmar ratio makes it among many imaginable investment potency measures, even if it is likely one of the lesser-known gauges of risk-adjusted returns. In reality, William Sharpe, creator of the Sharpe, won the Nobel Prize in economics in 1990 for his artwork on capital asset pricing thought.
