MAR Ratio: CAGR Divided by Maximum Drawdown

Key Takeaways

• The MAR ratio equals compound annual growth rate divided by maximum drawdown over the full record.
• It was popularized by the Managed Accounts Report newsletter for ranking managed futures programs.
• One severe drawdown can dominate the figure, so a single bad period defines the score.
• A reading above 0.5 is generally strong, and values above 1.0 are rare for standalone strategies.

What the MAR Ratio Is

The MAR ratio takes its name from the Managed Accounts Report, a newsletter that tracked commodity trading advisors and hedge funds. The measure became a standard way to compare managed futures programs on a single number.

The calculation is deliberately simple. Take the compound annual growth rate, or CAGR, of a track record. Divide it by the maximum drawdown, the deepest decline from a peak to a later trough over that same period. The result tells you how many units of annual growth the strategy earned for each unit of its worst loss.

The Intuition

Investors do not experience average volatility. They experience the worst stretch, the one that tests whether they hold or capitulate. The MAR ratio speaks to that lived experience by putting the single ugliest drawdown front and center.

Standard deviation treats a string of small wiggles the same whether they cluster into one deep hole or spread out evenly. A maximum drawdown does not. It captures the worst case an investor would have lived through if they bought at the top. By pairing that worst case with the long-run growth rate, the MAR ratio answers a practical question: was the eventual return worth the deepest hole I had to sit through?

How It Works

The formula is a single division:

MAR ratio = CAGR / maximum drawdown

Where:

CAGR = (ending value / starting value)^(1 / years) - 1
maximum drawdown = largest peak-to-trough decline, as a positive fraction

CAGR is the geometric annual return that accounts for compounding. The maximum drawdown is measured as the percentage drop from the highest equity peak to the lowest following trough, expressed as a positive number so the ratio comes out positive.

Both inputs use the entire track record. That is a strength and a weakness. A longer record gives more chances to record a deeper drawdown, so MAR ratios tend to fall as a history lengthens. Comparing a 3-year program to a 20-year one on raw MAR can mislead.

Worked Example

Suppose a managed futures program grew capital from 100 to 260 over 10 years. Its worst peak-to-trough decline during that decade was 25%.

CAGR = (260 / 100)^(1/10) - 1 = 2.6^(0.1) - 1 = about 0.1006, or 10.06%.

Maximum drawdown = 25%, or 0.25.

MAR ratio = 0.1006 / 0.25 = 0.40

The program earned about 0.40 units of compound annual growth for each unit of its worst drawdown. By common benchmarks that is a respectable, practical result. Push the worst drawdown to 40% with the same growth, and the ratio drops to 0.25, a noticeably weaker profile despite identical returns.

Common Mistakes

1. Comparing track records of different lengths. Longer histories tend to contain deeper drawdowns, dragging MAR down. A short, lucky record can post a flattering ratio that will not survive a full cycle.

2. Ignoring that one event defines the denominator. The maximum drawdown is a single observation. A strategy with one freak loss and otherwise shallow dips can look worse than a steadier one that suffers many medium drawdowns.

3. Treating MAR as volatility-adjusted. It uses drawdown, not standard deviation. It says nothing about day-to-day choppiness, only about the worst peak-to-trough path.

4. Forgetting drawdowns can deepen later. A live MAR ratio assumes the worst is behind you. A future decline can reset the denominator and the score at any time.

5. Reading high MAR as low risk. A high ratio reflects past return relative to past worst loss. It is not a promise about future drawdowns, which can exceed anything in the record.

Frequently Asked Questions

What is the MAR ratio in simple terms? The MAR ratio is a strategy's annual compound return divided by its worst peak-to-trough loss. A higher number means more growth for the deepest pain endured.

How does the MAR ratio affect investment decisions? It helps rank managers when surviving the worst drawdown matters as much as the return. A program with a strong return but a brutal drawdown can score lower than a steadier peer.

What is a real-world example of the MAR ratio? A commodity trading advisor with 10% annual growth and a 25% worst drawdown posts a MAR ratio of 0.40, a level many practical strategies reach. A 40% drawdown would cut that to 0.25.

How can investors use the MAR ratio effectively? Compare only track records of similar length, check what single event caused the maximum drawdown, and pair MAR with a measure that captures the frequency of smaller drawdowns.

How is the MAR ratio different from the Calmar ratio? The MAR ratio uses the maximum drawdown over the entire track record, while the Calmar ratio conventionally uses the worst drawdown over a trailing 36-month window. Calmar is more current, MAR more historical.

Sources

1. QuantifiedStrategies. "The MAR Ratio: The Risk-Adjusted Performance Metric for Traders and Investors." https://www.quantifiedstrategies.com/mar-ratio/
2. The Business Professor. "MAR Ratio Explained." https://thebusinessprofessor.com/mar-ratio-explained/
3. QuantifiedStrategies. "Calmar Ratio: Definition, Formula and Calculator." https://www.quantifiedstrategies.com/calmar-ratio/
4. Picture Perfect Portfolios. "MAR Ratio Explained: Tool for Risk Management in Investments." https://pictureperfectportfolios.com/mar-ratio-explained-tool-for-risk-management-in-investments/

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.