MAR Ratio - Explained

What is a MAR Ratio?

What is a MAR Ratio?

The Managed Account Reports Ratio, popularly known as the MAR Ratio, is a measurement of the return per unit of risk, and is used to compare performances of fund managers, commodity trading advisors and hedge funds. Risk is defined as the maximum drawdown, i.e. the most drawdown or loss experienced over the entire time period, starting from the inception until the date of query. Similarly, the Compound Annual Growth Rate (CAGR) is defined as the rate of return that an investment requires in order to grow from its beginning balance to its ending balance, provided that the returns are reinvested. The MAR ratio can therefore be calculated by dividing the Compound Annual Growth Rate since its inception by the maximum drawdown. Symbolically, MAR = CAGR / Max DD. It can be inferred from the above that the higher the MAR ratio, the better the risk-adjusted returns. The MAR ratio owes its existence to the Managed Accounts Report newsletter that was founded in 1979 by Leon Rose.

How Does the MAR Ratio Work?

Basically, the MAR ratio is a measurement of the annualized return per maximum drawdown. Let us consider the following example to explain how the MAR ratio can be applied in real-life comparisons. Consider two hedge funds M1 and M2 with Compound Annual Growth Rates (CAGRs) of 30% and 45% respectively. Now, supposing that both M1 and M2 have similar maximum drawdowns of 15%, then, their respective MAR ratios can be calculated as: MAR (M1) = 30/15 = 2. MAR (M2) = 45/15 = 3. In the above example, it is clear that M2 has a better risk-adjusted performance than M1.

MAR Ratio vs Calmar Ratio

While the MAR and Calmar ratios are similar in that both measure return per unit of risk, there are differences between the two metrics. For starters, while the MAR ratio compares results and drawdowns since inception, the Calmar ratio analyzes a shorter time period, typically 36 months of data. The Calmar ratio was formulated by Terry W. Young and first published in the trade journal Futures in 1991. Since its inception, the Calmar ratio has come across as a more accurate metric to measure fund and fund manager performance than the MAR ratio. This can be explained by returning to the previous example involving the two hedge funds. M2, with a MAR ratio of 3 has, seemingly, a much better risk-adjusted performance than M1, which has a MAR ratio of 2. Now let us elaborate on the one aspect that is of significance to the MAR ratio the inception of the funds. Suppose, M1 is a 20-year old fund, while M2 is just three years old. Using the MAR ratio to compare performances of M1 and M2 would not be justifiable in this scenario, since as a much older fund, M1 has without doubt, undergone much more market cycles compared to M2, which may have quite possibly, operated in much more favorable market conditions. In this situation, the Calmar ratio is especially useful and far more accurate, since it only analyzes three years worth of data for both funds, thus creating a far more level playing field. Not surprisingly, the MAR and Calmar ratios have thrown some vastly varying results as far as the S&P 500 and Managed Futures are concerned. For example, while the MAR ratio of the S&P 500 since its inception in 1994 until August 2013 was 0.12, its Calmar ratio for the period August 2010 - August 2013 was 0.44. Similarly, the MAR ratio of Managed Futures since 1994 until August 2013 was 0.33, while its Calmar ratio for the period August 2010 - August 2013 was 0.03.