Calmar, MAR, and the Ulcer Index

If maximum drawdown is the risk you care about, the natural performance ratio divides return by that instead of volatility. The Calmar ratio does exactly this:

conventionally computed over a trailing 36 months. The MAR ratio is the same construction over the fund’s entire history. A Calmar of 0.5 says you earned half a percent of compound return per percent of worst-case decline; above 1.0 is considered strong for a long-only equity strategy, and any number far above that should prompt you to check the window instead of congratulating the manager.

Both share maximum drawdown’s weakness — everything hangs on one observation. The Ulcer index addresses this by measuring the whole drawdown experience, depth and duration together, as a root-mean-square of the percentage drawdown at every point:

Because it squares, deep drawdowns dominate; because it averages over every period, a long shallow decline registers where MDD would ignore it. The name is not a joke — it was constructed to approximate how much distress holding the thing actually caused.

To read the number, anchor it: on monthly closes, the S&P 500’s ulcer index runs in the low double digits over any long window containing a 2008-sized bear, and low single digits across a calm bull stretch; an investment-grade bond fund sits around 2–4. So two funds with identical CAGRs and ulcer indexes of 4 and 12 delivered very different decades to their holders — and a track record claiming equity returns with a bond-like ulcer index deserves the smoothing scrutiny of section “Skewness, Kurtosis, and Strategies That Lie”.

Use Calmar to compare strategies over identical windows, and the ulcer index when duration matters as much as depth — which for anyone drawing income from the portfolio, it does.