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Calmar, MAR, and the Ulcer Index

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

Calmar = \frac{CAGR}{| MDD |}

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 rather than congratulate 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:

UI = \sqrt{\frac{1}{n} \sum_{t = 1}^{n} D_{t}^{2}}, D_{t} = \frac{V_{t} - max_{s \leq t} V_{s}}{max_{s \leq t} V_{s}} \times 100

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.

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.

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