The Calmar Ratio is a risk-adjusted performance measure used primarily in finance and investment to assess the relationship between an investment’s return and its downside risk or volatility. It was developed by Terry W. Young and is named after the California Managed Accounts Report, where it was first introduced.
This ratio is a gauge of the performance of your strategy. It is a function of the fund’s average compounded annual rate of return versus its maximum drawdown.
Statistically, Calmar Ratio = Net P&L/Max Drawdown
- A higher Calmar Ratio indicates a better risk-adjusted performance, where higher returns are achieved relative to lower drawdowns.
- It helps investors assess the consistency and stability of an investment strategy by considering both returns and downside risk.
- It’s particularly useful for evaluating hedge funds, managed futures, or other alternative investments where managing risk is crucial.
- A higher Calmar Ratio signifies better performance, with values over 0.50 generally regarded as favourable. A Calmar Ratio ranging from 3.0 to 5.0 is particularly strong.
Nevertheless, it’s essential to emphasise that while the Calmar Ratio is a valuable measure, it should not be the sole factor considered in evaluating an investment’s performance. It’s crucial to analyse it alongside other metrics to form a well-rounded understanding of an investment’s risk-return profile.