MAR Ratio: Measuring Trading Strategy Performance
The MAR Ratio was developed by the Managed Account Reports newsletter. It shortly became a popular tracking metric. The name is simply an acronym for the newsletter.
The ratio can be used for comparing CTA’s, CPO’s or even trading systems and strategies. One of the benefits of the ratio is that you can use it to compare a commodity trading advisor with a trading system and generally get a good comparison between risk adjusted returns for the programs, over a specific past period of time.
There are a couple of important points to understand when using the ratio. The longer the results for the trading program, the lower the ratio will ultimately become. Comparing 5 years of performance of one program against 2 years of performance of another program is not really a valid comparison. You need an equal amount of periods and also if the periods are of different time frames, it will again skew the results.
Remember, the ratio is only a metric of what happened in the past, it has no predictive power, whatsoever.
The ratio is meant to give you a quick reference for the risk adjusted performance of a period of time in the past. To calculate the Mar Ratio, divide the compounded annual return of the program since inception by the worst drawdown since inception.
Also, “Hall of Fame” MAR ratios, for extended periods of time, are between ½ and 1. For example, if you are trading a program with a ratio of ½ and are attempting to earn 20% per year returns, you will see at the very least a 40% drawdown.
Be careful if you see a program with a Mar ratio greater than 2. A big drawdown that will bring the ratio back to normal bounds is usually not far off.
A similar metric is the CALMAR Ratio, which was created by the California Managed Accounts Report newsletter. The CALMAR Ratio uses only 3 years of data and is calculated on a monthly basis, and uses the average return rather than the compounded return. To calculate it take the average annual rate of return for the last three years and divide it by the max drawdown in the last three years.
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