# Calmar Ratio

The Calmar ratio is a juxtaposing of the average annual compounded rate of return and the maximum drawdown risk of commodity trading advisors and hedge funds. If the Calmar ratio is lower, the investment performed on a risk-adjusted basis over the specified period time is worse. On the other hand, the higher the Calmar ratio, the better it performed. Carlos Oliveira in his literary work entitled "Practical C++ Financial Programming" describing Calmar ratio as a "measure of investment returns as compared to possible annual losses. It is used to compare investments with different risk profiles. The Calmar ratio is defined as the average annual rate of return for a given period, divided by the maximum drawdown (i.e., the maximum loss) during the same period. If you consider the same rate of return, investment with higher Calmar ratio had lower risk during the considered period" (C. Oliveira 2015, s. 123).

$$Calmar Ratio=\frac{Annual Return}{Maximum Drawdown}$$

## Annual Return

The annual return is the return that an investment submits over some time a while. It is defined as a time-weighted annual percentage. Sources of returns may include dividends, capital appreciation and returns of capital. The rate of annual return is pointed against the initial amount of the investment and represents a geometric mean rather than a simple arithmetic mean (B. R Hopkins 2012, s. 110).

## Return Over Maximum Drawdown

The Return over maximum drawdown, in the field of hedge fund management, id described as the difference between a portfolio's maximum point of return, and any further low point of performance. The Maximum drawdown is the biggest difference between a high-water and a subsequent low. Maximum drawdown is the most popular way of expressing the risk of a given portfolio - particularly as associated track records become longer - for investors who believe that observed loss patterns over longer periods are the best available proxy for actual issuance. In general terms, return over maximum drawdown is simply the average return in a given year that a portfolio generates, expressed as a percentage of this drawdown figure (CFA Institute 2017, s. 190).

## Difference Between Calmar Ratio and other ratios

The Calmar ratio is very similar to the Sharpe and Sterling Ratios, however, the main difference among these performance criteria is the proxy used for risk. The Calmar ratio is not as popular as the other to but is being used more frequently because it is simpler and easier to calculate than the Sterling or Sharpe ratios. What is more, the Calmar ratio gives a more realistic view of performance results. Reversely, the Sharpe ratio has the shortcoming of not reflecting the performance rightly in case autocorrelation is present in the returns. Greg N. Gregoriou is writing: "The Calmar ratio has numerous pitfalls the most prominent of which is ignoring the second and third greatest drawdowns. The other shortcoming is that the maximum drawdown is larger as the period time becomes longer; this characteristic of the Calmar ratio causes a lack of time-invariance" (G. N. Gregoriou 2008, s. 61).

## References

Author: Patryk Kozioł